Middle East Conflict Dampens Rate Cut Hopes, UK Benchmark Set for Weekly Decline

London's primary stock indices extended their losses on Friday as escalating Middle East tensions fueled inflation worries, casting a shadow over the Bank of England's monetary policy outlook. Energy firms, however, advanced alongside rising oil prices.

At the time of writing, the blue-chip FTSE 100 was down 0.3%, while the mid-cap FTSE 250 fell 0.7%. Both indices were on track for their second consecutive weekly decline.

Global market sentiment has weakened as the military engagement between the US, Israel, and Iran nears its second week with no signs of de-escalation.

With rhetoric from US President Donald Trump intensifying against Iran and Tehran's pledge to shut down the Strait of Hormuz, markets are bracing for a prolonged conflict.

The UK's heavyweight energy index climbed 1.3%, with oil majors BP and Shell rising 1.5% and 1.3% respectively, as crude prices surpassed $100 per barrel.

Most other sector indices declined, with the mining index dropping 2.1% to become the day's worst performer.

Meanwhile, investor concerns deepened after data from the Office for National Statistics showed the UK economy stalled in January, with Gross Domestic Product (GDP) flatlining amid weak services sector performance and rising energy price risks stemming from the Iran conflict.

"If the Strait of Hormuz reopens before the end of March, the economic impact should be limited, but a prolonged closure and sustained high energy prices are the real risks," said Berenberg analyst Jonathan Stubbs.

According to London Stock Exchange Group data, money markets have now priced out any expectation of a Bank of England interest rate cut in March.

Citing energy-driven inflation risks, Bank of America delayed its forecast for the first UK rate cut to June, joining Goldman Sachs, Standard Chartered, and Morgan Stanley in pushing back easing expectations amid the oil price surge linked to Iran.

"To avoid exacerbating inflation through a weaker pound, the Bank of England will likely keep rates on hold for the remainder of the year," Stubbs added.

Among individual stocks, HSBC Holdings PLC and Standard Chartered each fell around 1%. Both banks have significant investments tied to the Gulf region's rise as a global financial hub, and their operations face disruption as the Iran conflict unsettles their Middle Eastern ambitions.