Expectations for UK interest rates have shifted dramatically after the surge in global oil prices triggered by the widening conflict in the Middle East, with investors now increasingly betting that borrowing costs could rise rather than fall in 2026.
Financial markets are pricing in roughly a 70 per cent chance that the Bank of England will increase interest rates by a quarter percentage point before the end of the year, a stark reversal from expectations only a fortnight ago when traders anticipated multiple rate cuts.
Just two weeks earlier, markets had predicted that the Bank would begin reducing its base rate from the current 3.75 per cent, with the first cut expected at the Monetary Policy Committee meeting scheduled for 19 March.
Instead, the escalating war involving Iran, Israel and the United States has dramatically reshaped the economic outlook by sending energy prices sharply higher and threatening a fresh surge in global inflation.
The shift in interest rate expectations has been driven primarily by a rapid escalation in oil prices following disruptions to shipping routes through the Strait of Hormuz.
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