Renewed hostilities in the Middle East have sent oil prices soaring and stoked fears of potential interest rate hikes, Bank of England Governor Andrew Bailey warned Tuesday.
Bailey told MPs on the Treasury select committee that the situation has deteriorated in the past week following the shattering of a fragile ceasefire. The resumption of fighting has extinguished hopes for a peace deal between the US and Iran that might have signaled a return to normalcy after months of conflict.
Brent crude oil prices climbed above $87 a barrel on Tuesday, a significant increase from near $70 at the beginning of July. Economists are concerned that prices could surge beyond $160. These higher energy prices have revived inflation concerns, leading to a sell-off in UK government bonds, known as gilts. Yields on ten-year gilts rose above 5 percent for the first time since May.
MILITARY CONFLICT TIMELINE
The conflict in the Middle East began in late February when the US and Israel launched attacks on Iran. This led to the closure of the Strait of Hormuz, a critical chokepoint for approximately one-fifth of the world's oil and gas supply under normal circumstances. At its peak, the oil price reached as high as $126, resulting in higher fuel costs for consumers and increased energy bills.
A ceasefire earlier in July had seen oil prices return to pre-war levels. However, recent days have seen a series of attacks by the US on Iran, met with Iranian retaliation, escalating tensions once again.
Bailey indicated that he was not qualified to predict the duration or outcome of the current hostilities. "It underlines that this is going to be an unstable process for the foreseeable future," he stated.
Markets are now anticipating two further Bank of England interest rate increases by the end of the year, a development that could negatively impact millions of borrowers.