Megan Greene, an external member of the Bank of England’s Monetary Policy Committee, said UK economic activity was weak before the Iran war, according to Reuters on Tuesday. She also said the war’s effects are inflationary.
She said she was not convinced that the impact of negative supply shocks had fully worn off. She said inflation risks from the war matter, including possible second-round effects.
Greene said there will not be definitive evidence of second-round effects for some time, and it could take months. She said policymakers cannot simply look through negative supply shocks and that the assessment needs to be more nuanced.
The view is that UK economic activity was already weak, and the war is inflationary. We saw this in the latest figures, with Q1 growth stalling at 0.0% while March inflation unexpectedly rose back to 3.1%. This creates a difficult environment for the Bank of England, complicating any plans for rate cuts in the near future.
This suggests the market, which had been pricing in at least two rate cuts in 2026, may be too optimistic. The key concern is second-round effects, where higher energy and shipping costs feed into broader wage demands and price setting. We saw this play out during the energy crisis that started in 2022, which kept inflation persistent for much longer than originally anticipated.
For currency traders, this points towards heightened volatility in Sterling. A more hawkish central bank would normally support the pound, but a stagnating economy and geopolitical risk will weigh on it heavily. Therefore, buying options that profit from a large price swing in either direction on pairs like GBP/USD could be a prudent strategy.
UK stock indices, particularly the domestically-focused FTSE 250, face significant headwinds from this stagflationary pressure. We should anticipate that weak growth and the prospect of higher-for-longer interest rates will hurt corporate earnings. Positioning for a potential downturn here, perhaps through index put options, should be considered.
The most direct impact is on energy markets, as the conflict creates a classic negative supply shock. Brent crude has already surged past $115 a barrel, reminiscent of the spikes we witnessed in 2022 after the Ukraine invasion. Staying long on oil futures or related energy stocks seems to be the most direct way to trade this view in the coming weeks.
