Faisal Islam: Iran war is having a dramatic effect on the UK economy

"There is nothing like being asked to explain to the British public on Nicky Campbell's Five Live show why missile attacks on an Iranian oil field create a domino effect, reverberating in the mortgage markets. When you hear directly from farmers rationing their red diesel or homeowners having their mortgage offers pulled, it brings the charts and the numbers to life."

"The bottom line is the Bank did not cut interest rates, as was the clear expectation before the war started. Inflation will not now fall to the 2% target, as was also expected before the war. The Bank's forecasters said inflation could reach 3.5% in the coming months on the basis of Wednesday's oil and gas price."

"The markets convulsed upon reading the Bank of England's decision to put rates on hold. Long-term interest rates on UK government debt surged, indicating investors were betting the Bank would raise rates two or even three times this year. It seemed like an overreaction. But the near-term trajectory for the UK economy could completely flip as a result of these events thousands of miles away."

Geopolitical tensions in the Middle East create unexpected economic consequences across distant markets. The Bank of England held interest rates steady rather than cutting them as anticipated, citing inflation concerns stemming from oil and gas price spikes. Inflation is now expected to reach 3.5% or potentially higher in coming months, preventing the achievement of the 2% target. Long-term UK government debt interest rates surged as investors anticipated future rate increases. These energy price shocks fundamentally alter economic trajectories that showed signs of improvement through employment figures and anticipated rate cuts. Gas price increases will particularly impact households starting in July, with inflation trajectory remaining uncertain.

Read at www.bbc.com