The aftermath of the Middle East war causes oil prices to soar, and the UK financial markets are experiencing heightened anxiety.

The outbreak of war in the Middle East has caused oil prices to surge, heightening concerns about rising inflation in the UK. Consequently, market expectations for further interest rate cuts this year have shifted to the possibility of rate hikes, leading to significant volatility in financial markets. The UK bond market, in particular, is highly sensitive to these changes, exhibiting large fluctuations.

The yield on the 2-year UK government bond briefly rose to 4.239% today, a jump of 0.37 percentage points. Since interest rates and bond prices move inversely, this indicates a sharp decline in bond prices. Although market sentiment stabilized somewhat after a joint statement from G7 finance ministers considering releasing strategic oil reserves, lingering unease remains.

This instability is heavily influenced by changes in the Bank of England’s interest rate policy. Before the war, markets generally expected the benchmark rate to be cut once or twice more this year. However, after the oil prices soared due to the conflict, the likelihood of rate cuts disappeared, and the chance of a rate hike increased to about 57%. This shift has unsettled investors who rely on bond yields.

The UK’s fiscal situation has also heightened investor concerns. If the government intervenes to mitigate the impact of rising oil prices, fiscal pressures could intensify, potentially constraining fiscal space. Some experts predict that a mere 2.5 percentage point increase in inflation could squeeze the government’s budget capacity.

The possibility of a prolonged war is increasing, and its economic impacts are expected to persist. The UK urgently needs comprehensive economic analysis and risk assessment led by the government. Close attention must be paid to how future economic developments and international responses will influence market volatility.