Key facts
- Brent crude oil prices have risen for three consecutive sessions, nearing $95 per barrel.
- Renewed US strikes against Iranian targets have increased geopolitical tensions.
- UK two-year gilt yields have jumped over 4.5%, increasing borrowing costs.
- Analysts anticipate market volatility due to sustained high oil prices and potential interest rate hikes.
- Inflation in the UK is predicted to exceed 3% in the coming months before falling to 2%.
Soaring oil prices, driven by renewed US strikes against Iranian targets, are fanning inflation and pressuring global markets, with Brent crude nearing $95 per barrel. This surge follows three consecutive sessions of gains and has heightened concerns about supply disruptions, particularly near the Strait of Hormuz.
The pressure on oil prices is compounding fears of interest rate hikes. In the UK, two-year gilt yields have jumped over 4.5%, reaching an 18-year high, with longer-term yields at 5.9%. This increase in borrowing costs is putting the UK's economic stability under threat. Analysts at RBC Capital Markets noted that current interest rate pricing may not be realized due to risks of further weakness, heavily reliant on Middle East hostilities simmering out.
Economists broadly predict UK inflation to creep over 3% in the coming months before dropping back to the Bank of England's 2% target. However, the Monetary Policy Committee warned in August that it would likely raise interest rates if a conflict re-emerges between Iran and the US. In a worst-case scenario, inflation could top 4%, double the target rate. The US Federal Reserve chair, Kevin Warsh, has also signaled that interest rate hikes could be on the horizon, leading to a rapid sell-off in US Treasuries and pulling global yields higher.