A sense of relief swept through global markets today as news of a two-week ceasefire reignited hopes for a resolution to the Middle East conflict and the reopening of the crucial Strait of Hormuz.
In response, stock markets surged while oil prices receded to approximately $93 per barrel.
The dip in energy costs has alleviated some inflationary pressures, prompting traders to reassess the likelihood of interest rate hikes this year, resulting in decreased borrowing costs.
Despite these developments, Brent crude remains about 50% higher than its pre-conflict price of $73, as uncertainty looms over the Strait’s future status, with analysts cautioning that inflation concerns are far from over.
Boost for borrowers: Markets are now pricing in fewer interest rate hikes this year
Small boost for borrowers as chances of rate hikes fall
The reduction in oil prices to below $100, along with a 17% decrease in UK gas prices, is expected to relieve some of the financial strain on both consumers and businesses, positively influencing inflation projections.
Additionally, borrowing costs have seen a significant decline this morning. The 5-year gilt yield dropped by 22 basis points to 4.188%, while the 10-year gilt yield fell by 19 basis points to 4.717%.
That has prompted traders to slash the chances of interest rate hikes this year.
Markets now predict the Bank of England will only raise the base rate once, rather than the three or four increases which they had previously priced in.
That has provided a small boost to borrowers as swap rates start to fall, reversing some of the sharp increases seen since the start of the conflict.
However, analysts warn that mortgage rates are ‘likely to remain higher for some time yet’.
Adam French, head of consumer finance at Moneyfacts said: ‘The volatility of the conflict can quickly move markets, which may leave many lenders cautious about making any sudden moves.
‘The longer the ceasefire holds and markets calm, the more the mortgage market will stabilise, and rates could even begin to edge lower. But for now, it’s more likely to slow or pause increases rather than trigger any sharp falls.’
And while the Bank of England is more likely to press pause on interest rates, it is some way from the cuts that were previously expected.
Chris Beauchamp, chief market analyst at IG said: ‘The ceasefire news brings some relief for UK consumers on various fronts. But the heady days of January and February, when a sustained path of rate cuts was on the cards, are long gone for now, unlikely to return in the short-term. The most we can hope for right now is that the bank stays on hold all year.’
Inflation fears persist
The Middle East conflict has been nothing but volatile, as Trump issues and then reneges on various ultimatums, meaning that there is no certainty that the ceasefire will hold.
Even if it does, ‘some economic damage is already baked in,’ says Kallum Pickering, chief economist at Peel Hunt. ‘Expect higher inflation in the second half of the year and slower growth for major parts of the global economy compared to the pre-war outlook.’
A temporary pause in the conflict may ease inflation fears, but it is unlikely to change the outlook overnight.
Consumers are already feeling the pain of higher prices at the petrol pump and in air fares.
Latest figures from the RAC show the average price of litre of unleaded petrol is now 157.71p – up 25p or 19 per cent since the war began.
Diesel has topped the 190p mark, rising to 190.62p per litre, and is up 48p or 34 per cent since the end of February.
While the reopening of the Strait of Hormuz is significant, it will take some time to recover from the damage inflicted on oil and gas sites across the Gulf.
That is already being reflected in Brent crude prices, which dropped to as low as $91 a barrel following the announcement, before creeping higher as markets realise that supply will remain disrupted even once the Strait reopens.
Dan Coatsworth, head of markets at AJ Bell said: ‘Today’s retreat in the oil price is not deep enough to suggest that an inflation shock will be short-lived. Life is likely to get more expensive in the coming months, with or without a ceasefire. It’s just impossible to predict how long the higher cost of living environment will last.’
Qatari officials have previously warned that some of the damage to sites could take years to repair.
Stephen Dover, head of Franklin Templeton institute added: ‘The message is “less bad,” not “problem solved”. The ceasefire is temporary and conditional on Hormuz reopening and remaining open. Iran has framed this as a negotiating pause, not a resolution.’
There is also growing concern that Iran, which controls the key waterway through which a fifth of the world’s oil passes, will continue to charge ships a toll to pass through, adding to costs.
Rachel Winter, partner at Killik & Co said: ‘Even if [oil] remains at current levels just below $100, it will still have an inflationary impact as it’s significantly higher than earlier this year.
‘Despite this, the milestone of $100 has a big psychological impact and people feel more comfortable at this level, giving a much-needed boost to equity markets. Trump’s shift towards a more optimistic tone is also likely a key driver of this relief rally.’
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