Middle East Conflict Threatens Rachel Reeves’s Economic Plans

Soaring global energy prices, driven by escalating conflict in the Middle East, are jeopardizing UK Chancellor Rachel Reeves’s plans to stabilize the economy and foster growth, economists warn. The independent Office for Budget Responsibility (OBR) is set to release its spring forecast today, expected to show public finances moving in a positive direction, but the outlook is clouded by geopolitical instability.

OBR Forecast and Fiscal Buffer

The OBR projections are anticipated to indicate that the public finances are improving, maintaining a £22 billion fiscal buffer established in the November budget against Reeves’s fiscal rules. However, experts caution that these projections could quickly become outdated if the recent surge in oil and gas prices persists.

Energy Price Surge

Benchmark European gas prices rose by more than 40% on Monday, and the price of a barrel of Brent crude oil surged 6%, fueled by fears of supply disruptions. This energy price shock, rather than an oil shock, is seen as the more immediate threat to the UK economy.

Impact on Key Economic Indicators

The conflict is increasing risks to inflation and cost-of-living pressures, potentially undermining Reeves’s economic strategy. Market expectations for Bank of England interest rate cuts have dropped significantly, from 80% to just above 50%, since the conflict escalated. Reeves and her team had been hoping for rate cuts to encourage investment and consumer spending.

Expert Analysis

Mujtaba Rahman of Eurasia Group stated that the crisis is “completely outside [the government’s] control” and creates a “massive headwind.” He highlighted that the cost of living and interest rates – areas the government has emphasized – are now the most vulnerable. James Smith, chief economist at the Resolution Foundation, noted that the Gulf crisis has led to a higher inflation outlook and greater cost-of-living pressures, particularly if the conflict continues.

Calls for Action

The Liberal Democrats have urged Reeves to cancel a planned fuel duty increase in September to mitigate the impact of higher prices. Daisy Cooper MP argued that pressing ahead with the increase “would be disastrous” given the potential for soaring fuel prices.

Economic Growth and Bond Yields

While GDP growth was weak at 0.1% in the final quarter of 2025, recent business surveys suggest a cautiously improved outlook. However, rising yields on UK government bonds, driven by the Middle East conflict, could increase borrowing costs and challenge public finance improvements. A modest gilt sell-off on Monday pushed up 10-year yields by five basis points to 4.28%.

Reeves’s Response

Reeves is expected to insist she has “the right economic plan for our country, in a world that has become more uncertain,” and that decisions already taken have strengthened the economy, leading to falling inflation and interest rates, and improved financial well-being for working people.