Oil prices tumbled to below $90 yesterday after a pause in fighting between the US and Iran – but experts fear it is unlikely to be enough to stave off an interest rate hike later this year.
Brent crude had been trading at above $100 last week following a resumption of hostilities in the Middle East, closing at $96.78 a barrel on Friday.
But it was yesterday down by as much as $9, or 10 per cent, to $87.55. The price later settled at around $89, down 2.8 per cent.
The slide helped ease UK borrowing costs. Yields on ten-year UK bonds fell close to 4.97 per cent, having soared to 5.1 per cent last week.
Stocks were buoyed, too, with London’s FTSE 100 closing up 0.4 per cent, or 45.52 points, at 10781.75, its highest closing level since the earliest days of the war at the start of March.
The moves come ahead of the Bank of England’s next interest rate-setting meeting this Thursday.
Devastation: A US strike hits Tehran. Crude had been above $100 last week amid a resumption of hostilities in the Middle East. But yesterday it was down by as much as 10%, to $87.55
Rates are expected to be left on hold but officials are likely to have to explain how the path for rates may be affected should the on-off conflict continue.
There are fears that if the war rages on, pushing up inflation, rates will need to go up – hurting millions of borrowers and delivering a setback to Prime Minister Andy Burnham’s aim of addressing the cost of living.
Motorists are already being affected by higher prices at the pump while energy bills have also risen, putting upward pressure on inflation.
The Bank will be pushed to give clues about how it will respond should the squeeze on prices continue.
Michael Saunders, a former member of the Bank’s Monetary Policy Committee (MPC), which sets rates, said the MPC would take ‘not very much’ confidence from the latest fall in oil prices – which are still ‘sharply up from where they were a few weeks ago’.
Saunders, a senior adviser at Oxford Economics, told the BBC: ‘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.
‘In that case, interest rates may well need to go up before the end of this year.’
The latest drop in oil prices came after Donald Trump abruptly suspended a two-week campaign of air strikes against Iran.
Yesterday, the US President said Washington was ‘in very deep talks with Iran’, but that he was ready for ‘strong military action’ if diplomacy fails.
Meanwhile, Iran appeared to be putting Trump’s U-turn to the test, with Saudi Arabia, Jordan and Iraq reporting drone attacks yesterday.
Danni Hewson, of broker AJ Bell, said: ‘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.
‘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.’
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