Oil prices fell below $90 a barrel following a suspension of U.S. air strikes against Iran, though experts caution this decline may not be sufficient to avert an interest rate hike later this year. Brent crude, which had been trading above $100 per barrel last week amid renewed Middle East conflict, closed at $96.78 on Friday. By Sunday, the price had dropped as much as 10 percent to $87.55, settling around $89.
The decrease in oil prices provided some relief to global financial markets. U.S. bond yields saw a decline, and London's FTSE 100 stock index closed up 0.4 percent, reaching its highest level since early March. These market movements occur ahead of the Bank of England's upcoming interest rate decision on Thursday.
While interest rates are widely expected to remain unchanged this week, central bank officials will likely address how the ongoing conflict, even with a temporary pause, could impact future monetary policy. Concerns persist that a prolonged conflict could drive inflation higher, potentially necessitating increased interest rates. This would pose a challenge to Prime Minister Andy Burnham's efforts to alleviate the cost of living crisis, impacting borrowers, motorists facing higher fuel costs, and households dealing with rising energy bills.
Michael Saunders, a former member of the Bank's Monetary Policy Committee and senior adviser at Oxford Economics, suggested that the recent fall in oil prices offers limited comfort. "It's unlikely they will change interest rates at this week's meeting, but I think they will warn that if oil and gas prices stay around current levels, then inflation will go quite markedly higher in the next few months," Saunders told the BBC. He added, "In that case, interest rates may well need to go up before the end of this year."
The recent drop in oil prices followed an abrupt decision by U.S. President Donald Trump to halt a two-week campaign of air strikes against Iran. Trump stated that Washington is engaged in "very deep talks with Iran" but indicated a readiness for "strong military action" if diplomatic efforts fail. Despite the U.S. pause, reports from Saudi Arabia, Jordan, and Iraq indicated drone attacks occurring on Sunday.
Danni Hewson of broker AJ Bell commented on the market's reaction, noting that "Investors have got used to the massive fluctuations in oil prices, but what is hoped will be a sustained de-escalation in tensions has helped buoy global sentiment." However, Hewson also cautioned that "The fall in oil prices will help cool inflation fears, but the conflict has already damaged global growth prospects for both this year and the next."