Middle East Conflict Spurs Inflation Concerns, Affecting UK Rate Cut Expectations

The recent escalation in Middle East tensions has led to a surge in oil and gas prices, raising inflation concerns and impacting expectations for a rate cut by the Bank of England. According to Jin10, Stefan Koopman from Rabobank highlighted in a report that the energy shock could contribute approximately 65 basis points to UK inflation by mid-year. Data from the London Stock Exchange Group indicates that the probability of a rate cut by the Bank of England in March has dropped to 24%, down from 83% before the conflict began. Furthermore, the market has only fully priced in one rate cut for the entire year of 2026. Koopman noted that if the energy shock persists in the coming weeks and months, UK inflation may not fall to 2%, potentially hindering the Bank of England's ability to cut rates, even if unemployment continues to rise.