The oil story has moved on again. It’s no longer just about a higher price, but also about whether supply can flow safely, and how quickly governments can calm things down. Over the weekend, the UK discussed practical support to help keep shipping lanes open around the Strait of Hormuz, while the International Energy Agency pushed ahead with what it described as its biggest coordinated release of emergency oil stocks.
This all drops straight into the middle of the interest-rate debate. If energy stays expensive, inflation risks rise. But higher energy costs can also slow an economy down. Central banks hate that combination.
The UK has already had a clear reminder that growth was weak even before the latest energy shock properly took hold. On Friday, the Office for National Statistics said the economy recorded 0.0% ross Domestic Product (GDP) growth in January (flat on the month). Forecasters had been looking for around 0.2%. The same update also pointed to a softer patch in parts of the economy, including manufacturing.
So the Bank of England walks into this week with a problem. A rate cut would normally be easier to argue for when growth is flat. But if oil-driven inflation is rising at the same time, cutting rates becomes a tougher sell. The BoE decision on Thursday 19 March now matters more than it did a fortnight ago.
In the background, currencies have been moving in a fairly simple way: the dollar has tended to benefit when markets are nervous, while the euro has looked more sensitive to energy concerns. Sterling has been caught in the middle, steady at times against the euro but less comfortable against the dollar.
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