The Bank of England is closely monitoring the escalating crisis in the Middle East, as concerns grow that heightened tensions between Iran and Israel could hinder efforts to stabilize oil prices, potentially exposing the global economy to a shock reminiscent of the 1970s energy crisis.
Governor Andrew Bailey emphasized the seriousness of the geopolitical situation during an interview with the Guardian, stating that there are limits to what can be done to prevent crude oil prices from rising if conditions worsen significantly.
In light of recent military actions, including Israel’s invasion of southern Lebanon and Iran’s missile strikes in response, oil prices have surged by 3%, raising fears of supply disruptions from the region. Bailey remarked, “Geopolitical issues are very serious,” and described the ongoing conflict as tragic, noting that it could interact with already strained markets.
He highlighted that while there hasn’t been a significant increase in oil prices since the Hamas attack on Israel last year, vigilance is necessary as conditions could change rapidly.
Bailey also hinted at a potential shift in monetary policy, suggesting that the Bank might adopt a “more aggressive” approach to interest rate cuts if inflation data continues to improve. Currently, inflation stands at 2.2%, slightly above the Bank’s target of 2%, but Bailey expressed optimism that cost-of-living pressures have not been as persistent as previously anticipated.
Following his comments, the British pound fell by a cent to a two-week low as traders reacted to the possibility of more proactive interest rate reductions.
In defending the Bank’s past actions during crises such as the pandemic and the invasion of Ukraine, Bailey rejected accusations from former Prime Minister Liz Truss that the Bank was part of a “deep state” undermining her government.
He attributed her challenges to decisions made during her tenure and reiterated that without timely interventions by the Bank, Britain could have faced severe economic repercussions.