Oil and gas prices surged sharply on Tuesday following a renewed escalation of conflict in the Middle East, intensifying pressures on central banks to increase interest rates amid persistent inflation concerns. Brent crude oil climbed as much as 4.5 percent to exceed $109 per barrel, marking its highest level since May. The price later settled above $107, up 2.6 percent for the day after already rising 8.6 percent over the previous week.
The uptick followed attacks by Houthi forces targeting Saudi Arabia and Iranian strikes on vessels in the Gulf, prompting fears of further supply disruptions in a region critical to global energy markets. The recent incidents compound tensions after a key Saudi oil pipeline to the Red Sea, used to circumvent the Strait of Hormuz, was shut down last week.
UK natural gas prices also rose, reaching over 210 pence per therm—levels not seen since December 2022—with a daily gain of 6 percent. The spike in energy costs carries significant implications for inflation and economic growth worldwide. Analysts estimate that every $10 increase per barrel in crude oil adds approximately 0.2 percentage points to inflation while reducing economic growth by 0.1 percentage points.
The rise in commodity prices contributed to a sell-off in government bonds across the US and Europe. The yield on the 10-year US Treasury briefly surpassed 5 percent—its first ascent above this threshold in nearly three years—rising 0.04 percentage points to 5.01 percent at one point. This level last saw sustained trading prior to the 2008 financial crisis, though it briefly exceeded 5 percent for a single day in October 2023.
Similarly, UK gilt yields climbed, with 10-year rates reaching the highest since July 2017 before retreating slightly to 5.37 percent. Long-term 30-year yields hit levels unseen since 1998. These movements have heightened expectations that the Bank of England will raise interest rates twice before the end of 2026, even as it is widely predicted to maintain current rates at its upcoming meeting on Thursday.
The US Federal Reserve is also scheduled to meet Wednesday, with economists anticipating a rate increase aimed at curbing inflation exacerbated by the surge in energy prices. The continued instability in the Middle East and rising borrowing costs underscore the challenging environment confronting policymakers as they seek to balance inflation control with economic growth.