Swaps up as markets batten hatches down

The downward trajectory of swaps is no more as markets price in inflation risk and the prospect that the Bank of England may not cut rates this month after all. Just a week ago, a rate cut felt guaranteed with Threadneedle Street making all the right noises to that end. Now, on the back of events unfolding in the Middle East, there's every chance mortgage rates will rise again, which will be a huge setback for the property market just as it was starting to pick up momentum.

Swaps are definitely waking up this morning, markets don’t like uncertainty, and rising oil prices plus geopolitical tension tend to put inflation nerves back on the table pretty quickly. If this sticks, we could see some of the early-2026 rate cuts stall or even nudge backwards in March, although lender competition should stop things getting too dramatic.

For borrowers, the honest advice is don’t try to outguess the market! Even professionals rarely get that right. If you’re buying or remortgaging, securing a deal now can be a bit like grabbing a seat before the music stops, especially as many lenders let you switch later if rates improve.

Rising swap rates this morning are a reminder of how quickly sentiment can shift when inflation risks return. Higher oil prices and geopolitical uncertainty are pushing markets to reassess rate cut expectations, and we’re already seeing mortgage pricing react. After recent comments suggesting inflation was moving steadily in the right direction, Andrew Bailey may find those words tested sooner than expected if inflation pressures rebuild. Markets move faster than central bank guidance, and lenders price mortgages based on future expectations, not past statements. For borrowers, the lesson is clear: don’t try to outguess the market. Secure a mortgage that works for your circumstances and budget today, because waiting for the “perfect” rate is often the biggest risk of all.

Swaps were always going to be twitchy in this kind of environment. Oil-driven inflation risk plus geopolitical headlines is exactly the mix that pushes funding costs up fast, even if nothing has changed in the UK borrower’s day-to-day. I don’t see the Bank of England suddenly reversing cuts, but this is the sort of backdrop that gives them cover to sit tight for longer. It also underlines why forward guidance is risky - Andrew Bailey looked a bit too confident saying 2% inflation by May was “nailed on”. For anyone taking a mortgage now or remortgaging soon, don’t bank on rates steadily falling. If you’re within 3–6 months, review options early, secure a rate, and keep the ability to switch if pricing improves before completion.

The money markets want certainty, and there is suddenly a lot less with a major conflict in the Middle East and the ongoing war in Ukraine. If you have been holding off taking a new mortgage rate because you thought rates were only going to come down, it may well be worth securing a new rate and swapping to a cheaper one if and when it becomes available. I still suspect the Bank of England base rate will come down to ease the pressure on homeowners and to get people spending more money to boost the economy.

Traders have curbed their rate cut predictions for this year, and even the possibility of a rate cut this month has taken a hit. We are in for market volatility the longer this conflict lasts. Last week it seemed inflation was in sight and as were rate cuts. A lot can happen in one weekend.

The Bank of England is likely feeling a little less dovish on the back of the weekend's events in the Middle East. The confident prediction that inflation would be back at target by the late spring is suddenly infinitely less likely. Within as little as 48 hours, the inflation outlook has potentially changed.