Written by Millan Chauhan
Last week, we began to see clearer signs that the war in the Middle East is influencing central banks. The conflict has pushed global energy prices higher, particularly oil and gas. Year‑to‑date, the price of crude oil has risen by around 85%, increasing from $61 per barrel to $112 while UK natural gas prices have doubled.
When energy prices rise like this, such as during the Russia‑Ukraine conflict, it feeds through into wider inflation. Higher oil and gas costs increase household energy bills, transport expenses and the cost of producing goods. Air travel also becomes more expensive, because jet fuel is a major cost for airlines. There may also be risk of further inflation if fertiliser supplies from the Gulf are disrupted which could push up global food prices.
Although these effects take time to fully impact the economy, financial markets are already reacting, particularly in bond markets. Bond yields, which reflect the cost of borrowing, have risen as investors adjust their expectations for interest rates. At the start of the year, markets expected rate cuts in 2026 in both the UK and US. That now looks less certain, with some scenarios even pointing to potential rate increases. In the UK, the 2 year government bond yield, often linked to mortgage rates, has risen sharply from 3.5% to 4.6% in March alone. This is already feeding through into higher borrowing costs for households.
As a result, central banks are becoming more cautious. Last week, the Federal Reserve, European Central Bank, and Bank of England all chose to keep interest rates unchanged. They highlighted the risk that higher energy prices could push inflation back up.
Because food and energy are essential, rising prices in these areas can have a real impact on household budgets and economic growth. The recent jump in oil prices, driven by supply disruptions in the Strait of Hormuz, puts central banks in a difficult position. They must balance controlling inflation without slowing the economy too much.
Higher oil prices have supported commodity markets this year. The Bloomberg Commodity Index, which tracks 24 global commodities, has returned +23.1% so far in 2026, although it fell -0.5% last week, both in GBP-Hedged terms. Rising commodity prices are often seen as an early warning sign of inflation. Interestingly, gold, typically seen as a safe haven, fell sharply last week, dropping around -12%.
Stock markets reflected this uncertainty as global equities (measured by the MSCI All Country World Index), fell by -2.2% last week as concerns around inflation, interest rates, and geopolitical tensions weighed on investor confidence. However, energy companies performed well, benefiting from higher oil prices.
In this environment, we continue to believe that diversification is key. Different types of investments perform well at different times, and avoiding over reliance on any single area remains important. So far this year, real assets, such as commodities and infrastructure, have shown resilience and provided valuable balance within portfolios.
All performance figures are stated in Sterling terms, unless otherwise specified.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 23rd March 2026
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