Alastair Power, Investment Research Manager, breaks down the ongoing geopolitical crisis in the Middle East, assessing its impact on energy prices and inflation at home, its impact on global markets, and what it could mean for you.
Recent market activity has provided a timely reminder that geopolitics can be a key driver of short-term market volatility. Developments in the Middle East mark an escalation of prior tensions and the risk of a more prolonged energy crisis that could lead to slower economic growth and a more uncertain inflationary outlook.
Economic Implications
Oil prices moved higher through the initial stages of the conflict, remaining volatile as the conflict develops, causing a knockon effect with increases in wholesale UK electricity prices. Prolonged conflict in the Middle East and disruption within the Strait of Hormuz, a strategically important sea passage from the Persian Gulf, could see oil prices remain elevated. With energy prices being a component of the Consumer Price Index (CPI) measure of inflation, there is some concern regarding the potential for inflation rates to move higher, although the scale will be dependent on several factors, especially the duration of the conflict. In the near-term, UK households will be feeling the initial impact at petrol pumps but are expected to be somewhat insulated from rising energy costs given the pre-announced reductions to the energy price cap.
Interest rate markets saw adverse reactions in the period leading up to the Bank of England’s Monetary Policy Committee meeting on 19th March. The Committee opted to hold interest rates at 3.75% and may be forced to delay further reductions to later in the year. It’s likely there will be a return to the ‘wait and see’ rhetoric to assess the economic implications of higher energy prices. In the meantime, lenders are expected to continue repricing mortgage rates, which could lead to slower housing market activity.
Impact on the Markets
Global equity markets moved lower through the early stages of the event as a ‘risk-off’ stance took hold, leading to wider selling of liquid risk assets. For UK markets, the FTSE 100 experienced successive days of negative returns with sectors such as airlines and banking being some of the worst affected. UK government bonds have seen yields increase, with the 10- year UK gilt yield rising to the 4.7% level. Thus far in 2026, UK government bonds have produced a small negative return as prices reacted negatively to unexpected increases in inflation given expectations of the future cashflows being less valuable in today’s terms.
Oil prices have been the primary focus of market reactions, with the price during this conflict first rising above the US$100 per barrel threshold on Monday 9th March. Gold, which has historically been used by investors as a way to diversify their portfolios in times of market uncertainty, remains elevated and above the US$5,000 level per troy ounce, indicating the wider levels of risk aversion in the face of geopolitical volatility.
Looking Ahead
While current events are unsettling, the outlook for the coming year remains constructive despite volatility being expected to persist in the coming weeks. Iran itself has experienced a challenging period of economic performance, suffering from elevated rates of inflation and slowing economic growth, which could worsen if there is an ongoing loss of key revenue from oil exports should the Strait of Hormuz remain closed. With President Trump likely seeking a quick win in the run up to the November mid-terms, and China being the biggest importer of Iranian oil, both will want to avoid sustained higher energy costs. Should the situation be resolved in the coming weeks and energy price increases reverse, markets will likely revert attention to fundamental performance, leaving current escalations as another short-term period of volatility.
This article was taken from the March 2026 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of publishing but may have changed at point of reading.