Central bank alarm as oil soars to $126: Bailey and Lagarde warn of interest rate hikes to combat inflation shock
Oil and bond markets swung wildly yesterday over fresh turbulence sparked by the Iran war – and as central banks grappled with how to respond.The price of a barrel of Brent crude spiralled to more than $126 in early trading, a four-year high, as fears grew that peace remained a long way off.And UK benchmark borrowing costs neared 5.1 per cent as traders weighed up signs that it could mean an aggressive series of interest rate hikes.But as oil fell back towards $114, yields on UK ten-year bonds, known as gilts, slipped down towards 5 per cent.Meanwhile, London’s stock market enjoyed its biggest bounce in three weeks, as the FTSE 100 rallied 1.6 per cent, or 165.71 points, to 10,378.82, fighting back from a sell-off a day earlier.The turmoil came as deep uncertainty over the outcome of the Iran war continued to grip traders, two months after the US and Israel launched the conflict. Chaos: Andrew Bailey and Christine Lagarde are grappling with the fallout from the Iran warThe fighting has choked off oil and gas representing a fifth of world supplies that usually flow through the Strait of Hormuz.The prospect of a retreat by US President Donald Trump has been dubbed a Nacho scenario – ‘Not A Chance Hormuz Opens’.That has left central banks grappling with potentially severe outcomes, such as oil prices spiking at $130.Yesterday, the Bank of England warned that could push inflation as high as 6.2 per cent and leave it needing to raise interest rates to 5.25 per cent by early next year.Its rate-setting Monetary Policy Committee voted by 8-1 to leave interest rates at 3.75 per cent.Chief economist Huw Pill voted for an increase to 4 per cent. Seven of the remaining eight members signalled to a greater or lesser extent that rates may have to rise, with some suggesting the Bank may act ‘forcefully’.Meanwhile, in Frankfurt, the European Central Bank left rates on hold but its chief, Christine Lagarde, said officials had debated a rise – fuelling speculation that it could move in June. It came a day after the US Federal Reserve also left rates unchanged, though three of its 12 rate-setters rejected a ‘bias’ in its policy statement towards cutting rates in coming months.In London, Bank of England governor Andrew Bailey dismissed the suggestion that its stance was a ‘clandestine message’ that rates would rise.But James Smith, economist at ING, said the Bank was ‘inching closer to a rate hike in June’.And Sanjay Raja, the chief UK economist at Deutsche Bank, said: ‘Given elevated geopolitical uncertainty, risks of multiple rate hikes can no longer be discounted.’Last night, traders were betting on a near-50/50 chance of a rise in June and the likelihood of two to three hikes this year.Rob Wood, the chief UK economist at Pantheon Macroeconomics, said: ‘The committee suggest they have time to wait given tighter financial conditions. 'That lack of urgency likely contributes to the market reacting by cutting rate hike expectations.’DIY INVESTING PLATFORMSAJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you
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Central bank alarm as oil soars to $126: Bailey and Lagarde warn of interest rate hikes to combat inflation shock
