Investing.com — The Bank of England (BoE) is facing a renewed inflationary threat as surging energy prices, triggered by the escalating U.S.-Iran conflict, threaten to derail the UK’s disinflationary progress. According to a new analysis from Deutsche Bank AG NA O.N. (NYSE:DB), the “oil shock” resulting from the effective closure of the Strait of Hormuz could push UK headline inflation back toward 3% by the end of 2026.
The FTSE 100 remained under pressure on Monday, trading down 0.85% as investors weighed the impact of higher input costs. The analysts note that while the UK was on a path toward the BoE’s 2% target, the sudden spike in Bloomberg Brent Crude, trading near $95 a barrel, has introduced a significant “pro-inflationary” bias. The BoE’s Monetary Policy Committee (MPC) finds itself in a complex scenario as it must now balance cooling growth against imported cost-push inflation.
The primary concern for Threadneedle Street is the speed at which higher wholesale energy prices filter through to the Consumer Price Index (CPI). Deutsche Bank’s modeling suggests that a sustained 10% increase in oil prices typically adds roughly 0.2 to 0.3 percentage points to UK headline inflation over a six-to-twelve-month horizon.
The Strait of Hormuz accounts for a significant portion of global LNG and oil transit. Any prolonged disruption could lead to surging domestic utility bills and transportation costs.
Unlike the 2022 crisis driven by natural gas, the latest shock is centered on crude oil and maritime logistics. UK “goods” inflation is expected to be hit particularly hard, potentially offsetting the recent cooling in services. The strategists emphasize that if oil prices stabilize above $100, the BoE may be forced to abandon its planned easing cycle to prevent second-round effects in wage negotiations.
The geopolitical shock has significantly altered market expectations for the Bank Rate. Swaps markets are now pricing in a higher probability that the BoE will maintain restrictive levels well into 2027. This “stagflationary” shock, where prices rise as output softens, poses a direct threat to UK GDP, which Deutsche Bank projects could be dampened by 0.4% in 2026 if energy costs remain elevated.
The GBP/USD pair showed resilience, supported by a more hawkish BoE outlook. However, analysts caution that Sterling strength may be short-lived if the energy shock leads to a deeper contraction in industrial production.