Although Israel and other forces reportedly shot down the vast majority of attack drones flown by Iran early on Sunday morning, the ratcheting up of conflict has clear implications for trade and commerce.

The price of Brent crude oil was around $90 per barrel on Monday around 07:30 London time, slipping about 0.5 per cent, after prices had spiked before the weekend as fears grew that Iran was launching a drone and missile assault on Israel, which duly took place in the early hours of Sunday morning. Reports said almost all the drones/missiles had been shot down or had failed to hit Israel.

After rising above $1,920 per ounce on Friday, spot gold eased off to fetch $1,892 on Monday morning. Gold is a traditional "safe haven" asset. Elsewhere, the Hang Seng Index in Hong Kong was down 0.78 per cent; the Nikkei 225 Index of Japanese shares was down 0.74 per cent. The Euro Stoxx 50 of leading eurozone companies had slipped 0.25 per cent at the close on Friday.

Reports said that besides the efforts of the Israeli air defence systems, forces, including the UK’s Royal Air Forces, shot the drones down, showing how the conflict is becoming increasingly international.

The widening of conflict in the Middle East, with Iran openly attacking Israel – until now it has used alleged proxies such as Hamas (Iran denied responsibility for the 7 October attacks on Israel) – takes the geopolitical risks in the region up another gear. Besides fears about oil supplies, such air attacks interfere with West-East civilian air travel, possibly business and tourism in places such as the UAE, and increase caution. Another negative force has been attacks on shipping in the Red Sea area by Iran-backed Houthi forces in the the Mareb province of Yemen.

“The drone attacks by Iran on Israel overnight mark a new and potentially significantly more dangerous phase in troubles in the region,” Neil Shearing, group chief economist at UK-based independent research firm Capital Economics, said in a note. “The key risks for the global economy are whether this now escalates into a broader regional conflict, and what the response is in energy markets. A rise in oil prices would complicate efforts to bring inflation back to target in advanced economies, but will only have a material impact on central bank decisions if higher energy prices bleed into core inflation.”

“Energy markets remain the key transmission mechanism from regional tension/conflict to the rest of the world economy. Brent crude prices have already risen from $83 per barrel one month ago to over $90 per barrel in the past week, spurred in part by concerns about supplies and geopolitical risks from conflict in the Middle East and Ukraine,” Shearing continued. He noted that European gas prices rose by about 10 per cent over the past week following Russian drone attacks on storage facilities in Ukraine.

“As a broad rule of thumb, a 10 per cent increase in oil prices adds 0.1 to 0.2 percentage points to headline inflation in advanced economies. Accordingly, the rise in oil over the past month will add about 0.1 per cent to headline inflation in these economies. This is unlikely to have a significant bearing on central bank policy decisions.

“It would require a larger and more sustained increase in oil prices to have a significant influence on monetary policy. Specifically, it would probably require higher energy prices to feed back into core inflation, for example, because producers passed on the higher cost of energy to consumers. This is perhaps a greater risk in the US than it is in Europe given the relative strength of consumer demand. But set against this, disinflationary pressures from other sources are starting to build in goods markets, notably China where a large expansion of capacity over the past three years is now starting to weigh on export prices,” he added.