7th August 2026
Two Wars Threaten to End the Interest Rate Cuts: Why Borrowers Could Face a New Squeeze
The wars may be thousands of miles away, but their economic consequences could reach directly into British mortgages, business loans and household finances
For borrowers who had been hoping that the long-awaited return to lower interest rates was finally under way, the latest developments bring an uncomfortable warning.
The direction of travel has changed.
Instead of central banks steadily cutting interest rates as inflation falls, the wars and the resulting energy shock have created a new problem.
Inflation could start rising again.
That leaves the world's major central banks facing a difficult choice: tolerate higher inflation or keep interest rates higher for longer.
For households with mortgages and businesses dependent on borrowing, that could mean another squeeze.
The wars have changed the economic calculation
The most important link between the conflicts and interest rates is energy.
Oil and gas prices are affected by the security of supplies and shipping routes, particularly around the Middle East.
When energy becomes more expensive, the effects spread through the economy.
Transport becomes more expensive.
Businesses face higher production costs.
Food distribution costs rise.
Heating and electricity costs can increase.
Companies then face pressure to raise prices.
The danger for central banks is that what starts as an energy shock eventually becomes broader inflation.
The Bank of England is already worried
The Bank of England currently has Bank Rate at 3.75%.
It held the rate at its July meeting, but the Bank says energy prices remain high and volatile because of the conflict in the Middle East.
Inflation has fallen to 2.6%, but the Bank expects it to rise again later this year as higher energy costs work through the economy.
That creates a difficult situation.
The economy needs lower borrowing costs.
But if inflation begins accelerating again, cutting rates could make the problem worse.
The Bank's next scheduled interest-rate decision is 17 September 2026.
The ECB has already demonstrated the danger
The European Central Bank provides perhaps the clearest warning.
In June it raised interest rates by 0.25 percentage points, specifically citing inflationary pressures created by the Middle East war and higher energy prices.
The ECB's June projections put euro-area inflation at 3% for 2026, although it expected inflation to fall subsequently.
However, by July the ECB had decided to hold rates.
It warned that energy prices remained well above pre-conflict levels and that the full inflationary effects of the energy shock had not yet worked through the economy.
So Europe is already demonstrating how quickly the interest-rate outlook can change.
America faces the same dilemma
The US Federal Reserve held its interest-rate target at 3.5% to 3.75% at its July meeting.
But the decision was not unanimous.
Three members voted for a rate increase.
That is significant because it demonstrates that the debate inside the Federal Reserve has already moved beyond simply asking when rates should fall.
There is now a serious argument about whether rates might need to rise if inflation remains too high.
The Fed has an additional problem.
Higher interest rates can reduce inflation, but they can also weaken employment and economic growth.
The US therefore faces the same difficult trade-off as Britain and Europe.
This does not necessarily mean three rate rises
It is important not to exaggerate the danger.
The central banks are not currently announcing a coordinated programme of interest-rate increases.
Their decisions will depend on what happens to:
oil prices;
gas prices;
inflation;
wages;
employment;
economic growth.
If the wars de-escalate and energy prices fall, the pressure could disappear surprisingly quickly.
But if energy prices remain high for months, the central banks may have little choice but to keep borrowing costs higher than previously expected.
And that is the real danger for borrowers
The biggest threat may not be a dramatic rate rise.
It could be the disappearance of expected rate cuts.
Suppose a homeowner had been expecting mortgage rates to fall steadily:
5% → 4.5% → 4%
If inflation returns, the path could instead become:
5% → 5% → 4.8%
The borrower has not necessarily suffered a huge rate increase.
But they have lost the expected savings.
For a household planning to remortgage, that difference could be worth thousands of pounds.
Mortgage borrowers are particularly exposed
Millions of homeowners have mortgages fixed at rates agreed several years ago.
When those deals expire, borrowers must refinance at today's rates.
Some may have previously enjoyed rates around 2%.
Moving to rates around 4% or 5% can significantly increase monthly repayments.
That is why mortgage rates can remain a major household issue even when Bank Rate itself appears relatively stable.
And mortgage lenders do not wait for the Bank of England to announce a rate change.
Fixed mortgage rates are influenced by financial markets and expectations about future interest rates.
That means mortgage rates can rise before the Bank of England raises Bank Rate.
Businesses face the same problem
The impact goes far beyond homeowners.
Businesses borrow money to:
buy machinery;
expand premises;
purchase vehicles;
build stock;
invest in technology;
finance acquisitions.
Higher interest rates increase the cost of those investments.
For a large company, an extra percentage point may be manageable.
For a small Highland business borrowing several hundred thousand pounds, it can make the difference between expansion and postponement.
Rural businesses could feel the effects particularly strongly
For rural Scotland, the situation has another dimension.
Businesses often face higher transport and energy costs than their urban counterparts.
Farmers use fuel and machinery.
Tourism businesses depend on transport and heating.
Fishing businesses are highly exposed to fuel prices.
Manufacturers face transportation costs for both raw materials and finished products.
If higher energy prices combine with higher borrowing costs, rural businesses can therefore experience pressure from both directions.
The strange possibility: inflation and recession together
There is an even bigger economic danger.
Higher energy prices can produce inflation and weaker growth at the same time.
Consumers have less money available after paying energy and transport bills.
Businesses face higher costs.
Investment slows.
But prices continue rising.
This is one of the most difficult situations for a central bank because raising interest rates can help control inflation while making the economic slowdown worse.
The ECB has explicitly warned about this combination, saying that higher energy costs are weighing on growth while also pushing up prices.
What could bring rates back down?
There is still a route back towards lower interest rates.
If the conflicts ease, energy supplies become more secure and oil and gas prices fall, the inflationary pressure could diminish.
If wage growth also moderates and economic activity weakens, central banks would have greater freedom to reduce rates.
That is why the duration of the conflicts matters so much.
A short-lived energy shock is very different from a prolonged one.
The next few months could be crucial
For borrowers, the important indicators will be:
Oil prices
Will energy remain expensive?
Inflation
Does the recent decline continue?
Wages
Are pay increases continuing to feed into prices?
Economic growth
Is the economy weakening enough to restrain inflation?
Central-bank voting
Are more policymakers beginning to favour higher rates?
These will determine whether the recent mortgage-rate increases prove temporary or become part of a new period of higher borrowing costs.
What does it mean for ordinary households?
For households, the lesson is not necessarily to panic.
But it may be unwise to assume that mortgage rates will simply keep falling.
Anyone coming towards the end of a fixed-rate mortgage should be paying attention to the market rather than assuming that a much cheaper deal will automatically be available later.
The same applies to businesses considering major borrowing.
The cost of finance should now be treated as a significant part of any investment decision.
The bigger economic picture
The extraordinary period of almost permanently falling interest rates that many borrowers had begun to expect may be coming to an end.
That does not mean rates are about to return to the 5% or 6% levels seen during the recent inflation crisis.
But it does mean the path ahead is far less certain.
The wars have reminded the world that interest rates are not determined solely by domestic economic conditions.
A conflict thousands of miles away can disrupt energy supplies, push up prices and change the calculations of central bankers.
The message for borrowers
For homeowners, farmers and businesses, the most important message is perhaps this:
Don't assume that yesterday's forecast of lower interest rates will still be tomorrow's reality.
The wars have introduced a new inflation risk just as central banks were beginning to consider easier monetary policy.
If energy prices remain high, the era of falling interest rates could be delayed.
And for millions of borrowers, that could mean another squeeze on household and business finances.