The escalating Middle East conflict poses a significant threat to Rachel Reeves' economic plans, according to economists. As global energy prices soar due to the ongoing conflict, Reeves' strategy to tackle inflation and stimulate growth is under scrutiny.
In her spring forecast, Reeves aims to reassure the public that her economic plan is robust, despite the challenges posed by the crisis. She emphasizes the need for stability and continuity, especially after the turbulent period leading up to the autumn budget.
"The economy is on a delicate balance, and the government now faces an external crisis that could derail their efforts," Mujtaba Rahman, a consultant at Eurasia Group, warns. "The cost of living and interest rates, which were key areas of focus, are now at risk due to this unforeseen development."
The impact of the Gulf crisis on inflation is a major concern. James Smith, chief economist at the Resolution Foundation, highlights that the inflation outlook has worsened, putting additional pressure on living costs, especially if the conflict persists.
Before the US bombing campaign, markets anticipated an 80% chance of an interest rate cut by the Bank of England. However, as of Monday afternoon, that probability had dropped significantly, indicating a shift in market expectations.
Reeves and her team had been counting on further rate cuts to stimulate investment and consumer spending. But the surge in oil and gas prices, reminiscent of the Ukraine invasion, could dash those hopes. Chris Beauchamp, chief market analyst at IG, cautions that a similar price spike could disrupt the plan for more UK rate cuts, creating a major challenge for policymakers and consumers alike.
The Liberal Democrats urge Reeves to cancel the planned fuel duty increase in September, arguing that it would provide much-needed relief to families facing higher fuel prices as a result of the Iran conflict. Daisy Cooper, the party's Treasury spokesperson, emphasizes the importance of this measure to help households weather the storm.
While recent business surveys suggest a more positive outlook, GDP growth in the final quarter of 2025 fell short of expectations. The OBR's forecast will also consider the impact of lower yields on UK government bonds, which benefits the public finances by reducing borrowing costs for the Treasury.
However, the Middle East conflict threatens to undermine this positive movement. There was a modest sell-off of gilts on Monday, pushing up 10-year yields, indicating a potential shift in market sentiment.
As the situation unfolds, Reeves' economic plan faces a critical test, and the impact of the conflict on global energy prices remains a key factor in determining its success.
