OECD’s doom-and-gloom warning makes interest cuts even more unlikely in the near term
Britain is expected to suffer a sharper economic blow from the Middle East conflict than any other major economy, raising fresh questions over the path of interest rates and the outlook for UK borrowers.
In a new assessment of the global fallout from the war in Iran, the OECD has cut its forecast for UK growth this year to 0.7%, down from a previous projection of 1.2%. The downgrade leaves Britain at the bottom of the league table of leading industrialised nations for 2026, with the thinktank pointing to a weakening jobs market, falling business investment and a renewed shock from higher oil and gas prices.
By contrast, France, Germany and Italy are each expected to see only a marginal reduction in growth, reflecting lower exposure to global energy markets and different patterns of trade. The OECD says Britain’s heavy reliance on imported fuel and its sensitivity to swings in energy prices explain why the UK outlook has deteriorated more sharply than that of its peers.
The conflict has already pushed oil prices from about $60 a barrel at the start of the year to roughly $100, after attacks on Iran led to disruption around the Strait of Hormuz, a vital shipping route. That surge threatens to feed back into UK inflation through higher transport and heating costs, even as headline price pressures had begun to ease.
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The OECD warns that if energy prices remain elevated for an extended period, businesses will face higher operating costs and households will see further pressure on disposable incomes. That combination, it says, risks keeping inflation higher for longer and weighing on growth across 2026 and into 2027.
For the Bank of England, it represents a dilemma. Financial markets had been pricing in a series of base rate reductions as inflation retreated from its peak, only for this outlook to flip on its head with many now anticipating hikes. A renewed burst of energy‑driven price pressure could speed up rate increases and squash any hopes of a cut this year. This will keep mortgage rates above the levels many borrowers had started to hope for.
While the OECD still expects the global economy to expand by just under 3% this year, it cautions that the balance of risks is tilted to the downside. Prolonged disruption to Middle Eastern exports and any further spike in energy prices could trigger a broader repricing in financial markets and test financial stability.
The assessment comes as the chancellor, Rachel Reeves, signals that the government will need to go further to shore up Britain’s resilience. She has indicated plans to give regional mayors greater economic powers, step up support for innovation and artificial intelligence, and seek a closer working relationship with the European Union in an effort to strengthen long‑term growth.
For mortgage brokers and lenders, on one hand a weaker growth outlook and higher living costs may dampen housing market activity in some regions, as households become more cautious about taking on new debt or stretching affordability. On the other, expectations that interest rates will stay higher for longer are likely to sustain demand for remortgaging and product transfers, particularly from borrowers coming off pre‑crisis fixed rates.
Craig Head, director at Mortgage Required, previously told Mortgage Introducer that the gap between base rate stability and mortgage rate movement is becoming increasingly obvious.
“Following [the] decision from the Bank of England to hold the base rate at 3.75%, you might expect things to feel stable, but in reality, the mortgage market has been anything but,” he said.
“Over the past couple of weeks, we’ve seen rates shift incredibly quickly, largely driven by global uncertainty, particularly tensions in the Middle East, which have pushed up swap rates. So even though the base rate hasn’t moved, mortgage rates most certainly have!”
With Britain singled out as especially exposed to the economic shock from the Middle East, the OECD’s warning underlines that the path back to lower borrowing costs is unlikely to be smooth or maybe straight up unlikely. For advisers on the frontline of the mortgage market, the global conflict is now another factor to weigh in conversations with clients about rates, risk and resilience in the year ahead.
