Israel launched a series of strikes against Hezbollah targets in southern Lebanon overnight, a bold move defying public criticism from US presidential candidate Donald Trump. For financial markets, the calculus is straightforward: stability in the Middle East rests on containing Iran's proxy network, and Britain's economic interests are tied to a predictable security order. Gilt yields may spike on short-term volatility, but the greater risk lies in appeasing Tehran's expansionism.
Trump's rebuke of Israel's operation, which targeted missile stockpiles near the Litani River, ignores the reality of deterrence. Hezbollah has amassed over 150,000 rockets since 2006, and Israel cannot afford to wait for diplomatic niceties. The City understands that peace dividends are rare when your adversary sees restraint as weakness. Inflation expectations, already sticky due to energy costs, would soar further if Iran's proxies controlled regional trade routes.
Britain should stand unequivocally with Israel. Our own struggles with Iranian-backed groups in the Gulf and the Houthi attacks on Red Sea shipping demonstrate the cost of inaction. HM Treasury has already seen the price of volatility: insurance premiums for vessels in the region have trebled since October. A decisive message now could cool markets by reinforcing the line that aggression will be met with force.
The alternative is a slow bleed. Capital flight from the region would accelerate, pushing oil prices above $100 a barrel. UK import costs would jump, widening the current account deficit. The Bank of England would face pressure to raise rates further, choking growth. That is the premium for appeasement. Britain should back its allies, not freelance diplomats who confuse bellicosity with provocation.
