UK borrowing costs surged on Friday as the price of oil climbed back above $100 per barrel, triggering a global sell-off in bond markets. Yields on ten-year government bonds, known as gilts, surpassed 5.1 percent, a level not seen since the 2008 financial crisis.
The escalating oil prices, driven by the ongoing conflict in the Middle East, have fueled concerns about inflation and potential interest rate hikes by the Bank of England. Markets are now anticipating at least two rate increases this year.
This market turbulence is likely to impact households through higher mortgage rates, as well as increased fuel and energy costs. Motorists are already experiencing rising prices, with diesel up 8 pence per liter and petrol up 5 pence per liter in the past two weeks, according to RAC figures.
The surge in oil prices is attributed to the widening conflict involving Iran and attacks on key shipping lanes. Yemen's Houthi rebels have claimed responsibility for striking two Saudi tankers, impacting the Bab el-Mandeb Strait, a critical waterway. This follows earlier disruptions in the Strait of Hormuz.
Goldman Sachs analysts project that Brent crude could reach $120 per barrel in the fourth quarter and average $100 next year if the Strait of Hormuz remains disrupted. Persistent issues in the Bab el-Mandeb Strait could drive prices even higher.
Oil prices have been volatile since late February, following the commencement of conflict involving Iran. The price initially jumped from $72 to a peak of $126 in April before declining. However, since a fragile peace deal collapsed, the price has again climbed, reaching $101 by Friday.
Global stock markets also saw declines, with the FTSE 100 index closing 0.7 percent lower. Investors are reportedly cautious due to worries about an energy crunch and potential supply disruptions in vital energy arteries stemming from escalating Middle East tensions.
The situation presents a significant challenge for the new UK government, led by Prime Minister Andy Burnham and Chancellor John Healey, as they face questions about managing national debt and balancing fiscal commitments. Analysts suggest that Iran may be drawing the Houthi rebels into the geopolitical conflict, potentially opening new fronts.