Middle East Conflict Poses Major Risk to Rachel Reeves' Economic Strategy
Economists have issued a stark warning that the escalating Middle East conflict could severely undermine Chancellor Rachel Reeves' plans to combat inflation and stimulate economic growth. This caution comes as she prepares to deliver her spring forecast, where she aims to project an image of stability and continuity.
OBR Forecasts Show Positive Trends Amid Growing Uncertainties
The independent Office for Budget Responsibility (OBR) is expected to release projections indicating that the public finances are moving in a favorable direction. Reeves is anticipated to maintain the £22 billion fiscal buffer established in the November budget, aligning with her fiscal rules. In her statement, she will assert, "I have the right economic plan for our country, in a world that has become more uncertain."
However, experts caution that these projections may quickly become outdated if the recent surge in oil and gas prices persists. On Monday, benchmark European gas prices skyrocketed by over 40%, while Brent crude oil prices jumped by 6%, driven by fears of supply disruptions due to the conflict.
Economic Headwinds from Energy Price Spikes
Mujtaba Rahman of Eurasia Group highlighted the challenges, stating, "Just when Reeves thinks the economy is on a slightly more even keel, the government is now confronting a crisis that's completely outside its control, and it creates another massive headwind." He noted that the cost of living and interest rates, key areas of government focus, are now at heightened risk.
Despite these threats, Reeves intends to emphasize stability in her forecast, pointing to falling inflation and interest rates as signs of progress. She will declare, "Because of the decisions we have already taken, we have a stronger and more secure economy. Inflation and interest rates are falling. And in every part of Britain, working people are better off."
Inflation and Interest Rate Pressures Intensify
James Smith, chief economist at the Resolution Foundation, warned that the Gulf crisis could lead to higher inflation and increased cost of living pressures, particularly if the conflict endures. Market expectations have shifted dramatically; before the US bombing campaign, there was an 80% chance of an interest rate cut at the Bank of England's next meeting on March 19, but this has since dropped to just above 50%.
Reeves and her team have been banking on further rate cuts to boost business investment and consumer spending. Chris Beauchamp of IG compared the current situation to the 2022 energy price spike following Russia's invasion of Ukraine, suggesting that similar disruptions could derail plans for UK rate cuts.
Political Responses and Economic Indicators
The Liberal Democrats have urged Reeves to cancel the planned fuel duty increase in September to mitigate the impact of higher prices. Daisy Cooper MP, the party's Treasury spokesperson, argued, "With fuel prices poised to soar as a result of Trump's war with Iran, it would be disastrous for Rachel Reeves to press ahead with a fuel duty hike in September. It's the least she can do to help families weather the storm."
Economic data since the autumn budget has been mixed. GDP growth was weaker than expected, at just 0.1% in the final quarter of 2025, but recent business surveys indicate a more optimistic outlook. The OBR's forecast will also consider lower yields on UK government bonds, which reduce borrowing costs for the Treasury. However, this favorable trend is now at risk due to the Middle East conflict, as evidenced by a modest sell-off in gilts on Monday, pushing 10-year yields up by five basis points to 4.28%.
