Iran War Disrupts Global Inflation and Interest Rate Plans

The conflict in Iran and the closure of the Strait of Hormuz are destabilizing global economies, forcing the UK and US to abandon planned interest rate cuts. In the UK, April inflation fell to 2.8% due to a 7% reduction in the Ofgem energy price cap. However, Rachel Reeves, the Chancellor of the Exchequer, warned that inflation may spike as fuel costs rise. To prevent travel disruption, the UK government relaxed sanctions on Russian crude oil to allow imports of refined jet fuel and diesel.

Bank of England Governor Andrew Bailey testified that the war removed the expectation of interest rate cuts, which currently remain at 3.75%. He noted that two cuts may have been possible this year if not for energy shocks. Bailey also cautioned against sustainable long-term price controls after the Treasury reportedly approached supermarkets to voluntarily cap essential grocery prices—a move the British Retail Consortium compared to 1970s-style controls.

Across the Atlantic, Federal Open Market Committee minutes reveal that the US Federal Reserve is similarly concerned that Middle East energy disruptions are pushing inflation above the 2% target. The PCE index rose to 3.5% in March as oil prices approached $100 per barrel. While the benchmark rate was held at 3.5% to 3.75%, several regional presidents dissented against language suggesting future cuts, arguing that further tightening may be necessary. This policy shift occurs as Kevin Warsh succeeds Jerome Powell as Federal Reserve Chair.