Two key drivers of interest rates and mortgage deals are domestic inflation and economic confidence, both of which can be impacted by global events, particularly when they affect the cost of goods and services in the UK.
The long-term inflation target is 2%, so when it is higher than this – and especially when it’s rising – the Bank of England’s Monetary Policy Committee (MPC) will usually raise the Bank Rate (also known as the ‘base interest rate’), which makes borrowing more expensive and encourages people to save rather than spend. That pressure on spending means businesses can’t raise prices so quickly, which helps bring inflation down.
Conversely, if inflation is low, the MPC will be motivated to reduce interest rates to encourage people to spend and put more money into the economy.
Following the 2008 global financial crash, the base rate plummeted to 0.5% to help get people’s finances and the economy back on its feet. And in 2020, during the pandemic, it was brought down to an all-time low of 0.1%. Between 2021 and 2023, we saw it rise quickly to above 5% to combat soaring inflation brought about by the war in Ukraine, but it has been reducing over the last 20 months while markets have been fairly stable.
As well as impacting consumers, the base rate dictates borrowing costs for lenders themselves. So, when inflation and the base rate rise, mortgage rates generally follow, affecting those that need a new mortgage or need to remortgage.
The more volatile and uncertain the market, the less risk lenders can take. That means two and three-year fixed deals in particular, which are typically cheaper than five and ten-year fixed products, can become more expensive as it’s harder for lenders to predict short-term costs.
But at the same time, competition means lenders need to offer products that will continue to attract business, especially as the number of borrowers looking for new deals is likely to be lower when the cost of borrowing is more expensive.
What’s happened recently in the mortgage market?
Usually, lenders revise their products and rates every three months. However, in times of economic uncertainty, changes can be made much more frequently, as lenders look to protect themselves financially by increasing their rates in anticipation of the base rate rising.
With a significant portion of the global oil supply cut off, energy and motor fuel prices have been increasing. Inflation has risen to 3.3%, which is higher than was predicted by the Bank of England in February, and so far, in May 2026, they have not made any further cuts to the base rate this year, which leaves it at 3.75%.
Although the base rate has not yet increased, the MPC does expect inflation to rise further this year, and lenders have therefore been putting up the cost of borrowing and revising their portfolio of products.
When the Middle East conflict began at the end of February, most lenders began to put rates up and by 13th April, the average two-year fixed rate had climbed to 5.89% - up from 4.83% at the start of March. Even the lowest fixed rates were above 4.8%, having been below 3.5% in January.
The average two-year fixed rate is now slightly higher than the average five-year fixed rate, which is highly unusual, but current market volatility has forced lenders to cover themselves.
What could happen with rates over the rest of the year?
Although forecasts earlier this year were for several base rate cuts during 2026, this is now looking less likely, due to rising energy prices and inflation risks.
If the oil supply issue continues, energy prices remain high, and utility bills increase as the MPC expects, it is possible the base rate could rise, which would push up mortgage interest rates further.
However, this is a different situation to 2022, when inflation and rates shot up in response to the war in Ukraine. Sanctions on Russia and other pressures of war hit gas and electricity prices, and agricultural exports and other supply chain issues resulted in the cost food and drink going up as well. In addition, we had labour market pressures as businesses reset themselves post-pandemic. The economy is in a more stable position today, so even if rates climb slightly, we are highly unlikely to see those kinds of extreme rises again.
On the other hand, if the conflict finishes in the next few months, inflation should settle down, and it’s possible the Bank of England could make a base rate cut later in the year.
If you are currently on a standard variable or tracker deal and you haven’t yet spoken to a broker, do contact our team today. Our experts can help ensure you have the most appropriate mortgage product and discuss whether it might be better for you to move on to a fixed-rate deal.
And if you have a fixed-rate product that is due to expire in the next 6-12 months, it’s worth talking through your options now, as you can lock in a new deal up to six months in advance. You can get in touch with our team of experts by completing our online form, chatting with a support agent or calling us directly on 0800 144 4744.
Additional sources: Average 2-yr rates – This is Money
