The prospect of an end to the war between the United States and Iran is offering a glimmer of hope for millions of UK households grappling with soaring living costs. Oil prices have tumbled to a three-month low following news of a potential peace deal, while the Bank of England is expected to keep interest rates on hold this week.
Oil Prices Fall on Peace Hopes
Brent crude oil dropped more than 4% to $83 a barrel after US President Donald Trump claimed a peace deal with Tehran would reopen the strategic Strait of Hormuz. Global stock markets rallied by more than £500 billion on hopes of a lasting ceasefire. The UK's FTSE 100 index edged up around 30 points in early trading.
At the height of the conflict, oil prices had surged to nearly $120 a barrel, exacerbating inflationary pressures. However, the recent drop marks the lowest level since March, following reports that President Trump and Iran's deputy foreign minister had reached an initial agreement to end hostilities and resume traffic through the Strait of Hormuz. Pakistan, which brokered the deal, announced that both sides are set to sign a memorandum of understanding in Switzerland on Friday.
Relief for Motorists
Petrol prices have already begun to fall, with the average cost of a litre dropping to 156.5p, while diesel stands at 177.9p. Despite this, petrol remains over 23p per litre higher than before the conflict began and nearly 25p above last year's level. Luke Bosdet, the AA's spokesman, noted: "With just over a month to go before the start of the summer holidays, there is a much better prospect of spending less at the pumps and more at holiday destinations. That will also be a relief for the tourism industry, although war-hiked road fuel prices will still hurt resorts compared to last year."
Bank of England Holds Rates
The Bank of England's Monetary Policy Committee is widely expected to keep the base rate at 3.75% when it votes this week. Lenders have already started offering lower fixed-rate mortgage deals in anticipation. The average two-year fixed rate home loan has eased to 5.61%, while a typical five-year deal stands at 5.58%.
Adam French, head of consumer finance at Moneyfactscompare.co.uk, commented: "Mortgage borrowers will breathe a sigh of relief at the news of a peace deal in Iran. While we are far from being out of the woods yet, a lasting peace deal should dramatically reduce the risk of the Bank of England's worst-case scenario for inflation and interest rates becoming a reality. Under that scenario, Base Rate could have risen to 5.25%, potentially pushing typical rates on new mortgages towards 6.75%. Instead, today's news means mortgage rates, which have already been slowly falling for several weeks, have likely already passed their peak – at least until the next unwelcome crisis."
Inflation Outlook Improves
Figures from the Office for National Statistics due on Wednesday are expected to show that inflation rose in May, having dropped to 2.8% in April. However, economists now believe the peak will be lower than initially feared after the outbreak of the war. Inflation is predicted to come in below the 3.3% it reached in March.
Clive Black, head of consumer research at Shore Capital, said: "It is not yet time to put up the bunting but there could just be some better news ahead."
Cautious Optimism
While markets have reacted positively to the peace prospects, experts urge caution. Russ Mould, investment director at AJ Bell, stated: "Markets have finally got the news they've longed for since the beginning of March as the end of the Iran war is more clearly in sight. The framework deal is a major step forward to ending the conflict, although it is still not officially signed and remains light on detail. Markets seem cautiously optimistic there won't be any setbacks to getting it over the line, albeit investors are aware the narrative can change at the click of a finger. A full celebration is off the cards until the ink is dry on the deal."
Experts also warned that it will take time for oil and gas shipments through the Strait of Hormuz to return to pre-war levels, given the extensive damage to oil facilities in the region. The impact on other shipments, including fertiliser, will be felt for even longer.
