The Bank of England may be forced to raise interest rates later this year as surging oil prices raise fears of a renewed inflation shock.
Traders have increased bets that policymakers could push rates back up to 4% before the end of 2026 following the conflict involving Iran.
Money markets placed the probability of a rate hike as high as 75% on Monday morning after Brent crude surged by as much as 27% overnight to almost $120 per barrel.
The repricing also pushed the cost of short-term government borrowing sharply higher, marking the fastest rise in nearly two years as investors responded to concerns that higher energy costs will feed through to inflation.
George Cole of Goldman Sachs said interest rate increases “are possible under scenarios of much higher commodity prices”.
Five-year swap rates — a key benchmark used in mortgage pricing — climbed above 4% for the first time in a year.
The shift in market expectations comes just weeks after Andrew Bailey suggested households could expect further rate cuts later in the year as inflation was forecast to fall back toward the Bank’s 2% target.
Meanwhile, Rachel Reeves is due to join a call with finance ministers from the G7 to discuss the possible release of global oil reserves in an attempt to limit the impact of soaring crude prices.
Matt Cairns of Rabobank said the key question for markets is how long the Middle East conflict will last.
“Even with the global economy’s lower sensitivity to energy shocks and more diversified gas sourcing, a sustained rise in prices would still act as a tax on consumers and corporates,” he said.
