Since the start of the Russo-Ukrainian War in early 2022, it has been widely covered that the price of oil & gas, has a near direct effect on the rates set by The Bank of England & lenders. The reason is often attributed to inflation, but why, is often less clear.

Energy & Inflation

The relationship between oil & gas and inflation is one that’s easy to digest. The world needs energy; for transport, agriculture, manufacturing, heating, cooling and everything else. As 60% of global consumption is derived by burning oil & gas, when these commodities increase in price, the price of doing nearly everything else, also increases.

To date, the UK has fared okay under this inflationary pressure, although we are still expecting to see an impact later in the year. Globally the inlfation rate has increased by 0.6% as of June 2026, with the biggest impacts being seen in emerging markets.

Debt & Bonds

To understand how energy-driven inflation hits your mortgage, we have to look at how mortgage lenders fund the money they lend to you. They don’t just use the cash sitting in savers’ bank accounts; they rely heavily on buying and selling debt.

When inflation rises, the value of money falls, meaning the value of the debt shrinks. This is bad news for investors holding long-term, fixed-income investments like UK Government Bonds, known as Gilts. If inflation is high, the fixed return on a Gilt becomes practically worthless in real terms.

To entice investors to keep buying this debt, the yield (the interest rate paid on the bond to the investor) has to go up.

Swap Rates

So, we know that when inflation rises, the value of debt shrinks, and investors demand higher yields on Government Gilts to compensate. But how does a government bond impact the fixed-rate mortgage you are offered by a high street lender?

The bridge between the two is something called a Swap Rate.

To understand swap rates, you have to look at the risk a lender takes on. When a bank offers you a 5-year fixed-rate mortgage, they are promising that your interest rate will not change for 60 months, regardless of what happens in the global economy.

However, the bank itself often borrows the money it lends to you on a variable basis. This creates risk: if global interest rates spike in year two of a mortgage, the bank’s borrowing costs go up, but they are legally bound to keep your mortgage payments exactly the same, costing the lender.

To protect themselves, lenders buy a financial “insurance policy” from other major financial institutions. They agree to “swap” their unpredictable variable-rate risks for a guaranteed fixed rate. The price the lender pays for this fixed-rate security is the swap rate.

Because Government Gilts are considered the benchmark for risk-free lending, swap rates track Gilt yields exceptionally closely.