Middle East breakthrough boosts hopes for lower inflation

Financial markets rallied after reports of a more durable agreement involving Iran, the United States and Israel raised hopes that energy supplies through the Strait of Hormuz could return to normal, easing inflationary pressures that have weighed on businesses and consumers in recent months.

Energy markets responded positively, with Brent crude falling by more than 4% to around $83 a barrel and UK gas prices declining by 6%. While prices remain significantly higher than before the conflict began, investors welcomed signs that supply disruption risks may be easing.

The prospect of lower energy costs has also prompted a reassessment of the outlook for interest rates. Expectations of further rate rises from central banks have softened, with both the Bank of England and the US Federal Reserve widely expected to leave rates unchanged at their upcoming meetings.

Susannah Streeter, chief investment strategist at Wealth Club, said: “Investors are buzzing with relief given a longer-term solution to the Middle East crisis seems to have been clinched which should ease the energy crunch.

“After months of dashed hopes, a more secure deal appears to have been struck between the US, Iran and Israel, which should enable oil, gas and other vital supplies to flow freely through the Strait of Hormuz. Stocks in Asia surged higher, and European markets are poised for a bounce, as companies finally eye respite from soaring costs.”

Streeter added: “With energy prices falling back, inflationary pressures should start to ease off. However, prices are still elevated, with crude some 16% higher compared to just before the war broke out and gas prices still more than 30% higher.

“It’s partly because some nervousness remains given that we’ve had plenty of false starts to this peace process. It also reflects the expected slower start to the resumption of energy flows, given the damage wreaked to facilities across the Gulf region which will take many months to repair.”

Commenting on the outlook for interest rates, Streeter said: “There is an expectation that inflation won’t now be quite so onerous for economies, and so there’s a reassessment going on about where interest rates could end up. Worries about multiple rate hikes this year from the Bank of England look set to recede.