War in Iran to Keep BoE on Hold

The ongoing conflict in Iran has sent shockwaves through global markets, with oil prices swinging wildly and central banks forced to reassess their next moves. Brent crude surged to $115 per barrel before retreating to $85, only to climb again to around $105—far above the $70 level seen before the crisis began.

Equities and bonds mirrored these fluctuations, though less dramatically. Global stocks slipped 0.9% last week, leaving them down 3.7% from February’s peak but still slightly positive for the year. China managed a modest gain, while the UK held relatively steady. Energy stocks were the only sector to post growth, underscoring the war’s direct impact on oil-linked industries.

Bond markets also weakened as yields rose, reflecting fading hopes of rate cuts in the US and growing fears of hikes in Europe and the UK. Gold fell back to around $5,000 per ounce, while the dollar strengthened further.

At the heart of market uncertainty lies the Strait of Hormuz, a critical shipping route now closed due to the conflict. The possibility that it could remain blocked for months has rattled investors and policymakers alike. Despite US efforts to secure safe passage with NATO allies and China, and separate negotiations by India and European nations, the timeline remains unclear.

To ease pressure, the G7 has agreed to release 400 million barrels from strategic reserves. Yet with 20 million barrels typically passing through the Strait daily, the measure only partially offsets the disruption.

The surge in oil prices is reshaping economic forecasts. Inflation projections have been revised upward by 0.5–1%, while growth expectations have been trimmed by 0.25–0.5%. In the US, headline inflation could rise to 3.5% in the coming months, while the UK may see inflation climb back to 2.5–3% instead of falling to the Bank of England’s 2% target.

For central banks, higher inflation outweighs weaker growth. The US Federal Reserve is expected to delay rate cuts until later in the year, while the Bank of England is likely to hold steady rather than cut rates as previously anticipated. In Europe, markets are even pricing in potential hikes, though these may prove excessive.

Despite the turbulence, history suggests markets could rebound once the Strait reopens. Past geopolitical crises have typically led to short-lived declines followed by rapid recoveries. For now, however, the war in Iran remains the dominant force shaping global economic policy.