The impact of the Iran crisis in the Middle East on oil and gas prices could raise inflation and limit or delay interest rate cuts from the Bank of England (BoE), economists have warned.
Hostilities in the Middle East are entering their third day, with the US and Israel continuing to strike Iran following the death of Supreme Leader Ayatollah Ali Khamenei.
Oil prices have jumped up, with Brent crude – the most traded of all of the oil benchmarks – rising more than 9 per cent on Monday, while natural gas prices have risen too.
Around 20 per cent of the world’s oil and gas is shipped through the Strait of Hormuz between Iran and the United Arab Emirates and Iran has warned vessels not to pass through the waterway.
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Leading forecaster Capital Economics has said that if sustained, the rise in oil prices could add up to 0.3 percentage points to the consumer prices index (CPI) measure of inflation and the rise in natural gas prices could add a similar amount.
Paul Dales, the forecaster’s chief UK economist, said: “CPI inflation could be 0.5-0.6 percentage points higher than otherwise.
“Given inflation is currently above target, inflation expectations are higher than before the pandemic, and the public’s inflation expectations tend to respond to changes in energy prices, the Bank of England is likely to be more sensitive to this than other central banks.
“This could delay or limit the extent of rate cuts this year. Much depends on how events evolve.”
The BoE tends to cut interest rates as inflation returns to its 2 per cent target.Capital Economics had predicted it would hit the 2 per cent target in spring, but this is now in jeopardy.
If the Bank rate was not cut from 3.75 per cent in the coming months, it could mean people’s mortgage rates stay higher for longer, or even rise.Other analysts agreed that the situation could limit the chance of interest rate cuts.
Chris Beauchamp, chief market analyst at trading platform IG, said: “The huge bounce in European natural gas prices threatens to upset the more positive outlook for UK inflation and consumer spending.
“Hopes that pricing pressures would ease and consumers could spend more could be dashed as a price spike similar to 2022 causes a major headache for both policymakers and consumers, potentially disrupting the plan for more UK rate cuts.”
Thomas Pugh, economist at RSM UK, said that the price rise was not enough for now to stop the BoE cutting rates later this month, but beyond that, it could reduce the chance for further cuts.
He said: “If the recent surge in oil and gas prices is sustained, this could offset much of the sharp drop back to 2 per cent inflation that we currently expect in April.
“For now, we doubt the jump in energy prices is enough to stop the Bank from cutting in March to support the labour market. Beyond that, a sustained rise in energy prices would prevent the Bank cutting any further, despite the traditional response being to look through any jump in inflation due to energy prices.
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“The Bank may not feel like it has that luxury right now as inflation expectations remain elevated and memories of the Russia-Ukraine crisis are still relatively fresh.”
Financial markets struggled slightly on Monday as they reacted to the news in the Middle East.
London’s FTSE 100 Index, which tracks major UK-based firms, opened lower and trended downwards as oil prices surged, though defence firms fared well.
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