- The FTSE 100 falls almost 1% as oil and gas prices surge.
- The Bank of England is set to follow the Federal Reserve and keep interest rates on hold.
- The spectre of stagflation is looming as inflationary pressures mount while consumers and companies turn increasingly cautious.
Credit: Shutterstock / Hamara
“Fears of a sustained energy shock have resurfaced after the escalation in the Iran war sent oil and gas prices soaring. The prospect of a longer, more drawn-out conflict is in sharp focus, as both sides ratchet up attacks on energy infrastructure. Downbeat sentiment is spreading fast, with London’s Footsie opening around 1% lower as investors assess the repercussions for the global economy.
Brent crude remains highly volatile but has traded as high as $114 a barrel today, threatening to climb back towards recent scorching levels. Gas prices have surged by 25%, reaching a range not seen since early January 2023.
Warnings that oil could reach $150 a barrel have resurfaced. Israel’s attack on Iran’s gas fields has prompted retaliatory strikes on facilities in Qatar. Europe in particular is reliant on LNG exports from Qatar, as countries have been weaning themselves off dependence on Russia. The conflict is not only highly damaging for economies in the region, with tourism and business activity hit, but the knock-on effects of higher energy prices will have toxic repercussions worldwide.
The Bank of England’s Monetary Policy Committee is meeting against this turbulent backdrop, and it looks almost certain to keep interest rates on hold given the inflationary risks posed by the conflict. Not only is the headline CPI rate likely to rise due to higher fuel and energy bills, but there will also be concern that companies will pass on escalating costs through higher prices across a range of goods and services.
Food prices, which had been easing, risk rising again as freight costs increase and fertiliser exports from the Middle East are disrupted. There are also concerns about helium supplies being stranded, a key component in semiconductor manufacturing, which could lead to delays in producing electronic goods and even cars. Traders are now placing more bets on the Bank being forced to raise interest rates by the end of the year, a sharp reversal in policy - just as borrowers had been hoping for relief.
The mood among central bankers is understandably sombre. The Federal Reserve, as expected, kept interest rates on hold, and Chair Jerome Powell warned of fresh inflationary pressures entering an already complex environment. The European Central Bank, Sweden’s Riksbank, and the Swiss National Bank are also set to announce their policy decisions today. Caution is likely to dominate, with investors expecting a particularly hawkish tone from the ECB. While a hold is anticipated for now, further rate increases are increasingly expected later this year as inflation expectations shift.
The spectre of stagflation is hovering, with the combination of rising prices and stagnating growth posing a real threat. High energy costs are set to dampen consumer spending and curb business investment as both grapple with elevated bills and ongoing uncertainty.”