The escalating tensions between the US and Iran have ignited a surge in global oil prices, fueling concerns that interest rates in the UK may need to rise sooner rather than later. The price of Brent crude, the international benchmark, climbed by 4.6% yesterday to reach $87.08 per barrel, its highest level since late May. This sharp increase follows a 10% jump on Monday, triggered by US President Donald Trump's announcement of a blockade on Iranian shipping.
The ripple effect has been felt across energy markets, with UK natural gas contracts for August delivery rising by 3.3% to 128.27p per therm – their highest price in over three months. Similarly, the European benchmark, the Dutch natural gas contract, reached its highest point since early April, having risen by nearly 3%. These increases in energy costs are intensifying fears of renewed inflationary pressures, which in turn are prompting financial markets to anticipate more aggressive monetary policy from the Bank of England.
For the first time this month, financial markets are pricing in a quarter-point interest rate increase by the Bank of England by September, with a further quarter-point rise expected before the end of 2026. This represents a significant shift from the beginning of July, when a fragile ceasefire between the US and Iran led markets to anticipate less than a quarter-point rise for the year. The European Central Bank is also expected to follow a similar trajectory, with traders forecasting two quarter-point rises by year-end.
The Strait of Hormuz, through which approximately one-fifth of global oil supply passes, remains a critical concern. Mr Trump has stated that the waterway will remain open, but plans to impose a 20% fee on ships transiting through it – purportedly to cover security and safety costs. This policy reversal has exacerbated concerns about sustained upward pressure on oil prices, potentially exacerbating inflationary trends.
Kathleen Brooks, research director at XTB, notes that previous blockades of the Strait of Hormuz have lasted over 60 days, while recent traffic through the strait has slowed significantly, with only six cargo ships traversing the route on Sunday compared to recent weeks. This slowdown in supply chain activity is a key factor contributing to the upward pressure on oil prices.
As tensions persist, UK government bond yields rose to their highest level since May, while stock markets were muted, with the FTSE 100 index slipping by 0.4% yesterday – despite gains for major oil companies like BP and Shell.