Ongoing conflict in the Middle East piles pressure on central banks

Ongoing conflict in the Middle East piles pressure on central banks

15 May 2026

The war in Iran has continued and tensions in the Strait of Hormuz have escalated, despite both sides agreeing to an initial ceasefire. Rising oil prices and the knock-on impact on inflation have led major central banks to pause interest rate reductions whilst the situation in the Middle East develops. 

We explore the impact of current events on pension scheme investments in our latest market update.

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In early April a two-week conditional ceasefire was agreed between the US and Iran. The outcome was expected to support a workable basis in which the conflict could be reasonably resolved. However, as April ended, Iran and the US were no closer to ending the conflict and tensions in the major global shipping lane, the Strait of Hormuz, escalated again.

The closure of the Strait has been a major disruption to global supply networks which has subsequently seen the price of oil soar. The Brent Crude international oil benchmark surpassed $126 a barrel, its highest level since 2022, before falling back to $114 by the end of the month
amidst Trump’s announcement that the closure could continue for some time. However, volatility in oil prices provided an opportune time for United Arab Emirates’s (UAE) departure from OPEC. The UAE was the cartel’s third largest oil producer accounting for around 12% of total output. Without cartel quota restrictions, the UAE has potential to increase its supply and push global oil prices down.

Rising energy costs have been a major driver in stubbornly high inflation. Over the month, Eurozone inflation rose to 3%, whilst both US and UK CPI inflation rose to 3.3%, as all three respective central banks voted to hold interest rates at current levels. The dovish approach signals concerns over a higher-for-longer impact of rising prices as a result of the Iran war. Stagflation has been another key factor in both the Bank of England and the European Central Bank’s use of monetary policy, where they must balance their primary objective of targeting 2% inflation against supporting economic growth. Over April, Eurozone growth slowed to just 0.1% GDP.

In equity markets, the S&P 500 enjoyed a bumper month buoyed off the back of the initial ceasefire announcement to reach a new all-time high. Tech stocks continue to be a significant driver of returns as robust corporate earnings have improved investor sentiment despite global energy shocks. Emerging market equities also hit record highs over April, recovering their losses from the early stages of the Iran conflict helped by a rally on a selection of Asian chipmakers.

The cost of UK government borrowing has increased over April owing to a sell-off in the gilt market. Energy increases, political uncertainty and a shaky ceasefire pushed the 10-year yield up to just over 5% in April. The increase in the cost of government borrowing piles pressure on Chancellor Rachel Reeves as UK public sector borrowing exceeded expectations hitting £12.6bn in March, up from the £10.3bn previously forecasted. Investment grade credit spreads narrowed marginally over the month, whilst long term inflation expectations dipped midmonth but then rose back to broadly where they started the month.

The aggregate funding level of UK DB pension schemes on a low risk basis has improved over the month, driven by positive performance for growth assets combined with rising yields.

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For further information, please get in touch with Jamie Queen or speak to your usual XPS Group contact.

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