(Oil Price) – If it goes out of hand, the escalating conflict in the Middle East risks dealing a severe blow to monetary policy as it would lead to a surge in oil prices, Bank of England Governor Andrew Bailey told the Guardian in an interview published on Thursday.
“Geopolitical concerns are very serious,” Bailey told the newspaper.
International crude oil prices have been on the rise this week after Iran’s missile attack on Israel earlier in the week, as markets are awaiting the Israeli response.
Oil prices were rising by 2% early on Thursday, and the U.S. benchmark has now broken above the $70 per barrel threshold, as prices were fueled by expectations of Israel’s retaliation against Iran. Fears of a broader war in the Middle East have materially grown this week.
The biggest worry is, of course, Israel targeting Iranian oil infrastructure, which analysts expect it to do.
“The next turn in this retaliation spiral may very well involve oil – via the degrading of Iran’s oil capacity or Iran’s proxies attacking oil and gas shipping from the Persian Gulf,” according to Piper Sandler analysts, as quoted by CNBC.
The market fears that oil supply from the Middle East could be affected in case of a wider conflict directly involving Iran, or if Tehran moves to block the most important oil route in the world, the Strait of Hormuz.
Since the Hamas attack on Israel a year ago, oil prices haven’t seen a shock.
“From the point of view of monetary policy, it’s a big help we haven’t had to deal with a big increase in the oil price,” the Bank of England Governor told the Guardian. “But obviously we’ve had that experience in the past, and in the 1970s, the oil price was a big part of the story.”
“You have to continuously watch this thing, because it could go wrong,” Bailey said, referring to the situation in the Middle East.
Yet, he added, “my sense from all the conversations I have with counterparts in the region, is that there is, for the moment, a strong commitment to keep the market stable.”
By Tsvetana Paraskova for Oilprice.com
