The escalating Middle East conflict casts a shadow over Rachel Reeves' economic plans, sparking concerns among economists. As Reeves prepares to unveil her spring forecast, the impact of soaring global energy prices threatens to undermine her strategy for tackling inflation and stimulating growth.
In response to the independent Office for Budget Responsibility's (OBR) latest projections, Reeves asserts that her economic plan is robust, designed to navigate an increasingly uncertain world. The new forecasts indicate progress in public finances, with the £22 billion fiscal buffer she allocated in the November budget remaining largely intact.
However, experts caution that these projections may quickly become obsolete if the surge in oil and gas prices persists. European benchmark gas prices soared by over 40% on Monday, while Brent crude oil prices jumped by 6%, driven by fears of supply disruptions. Mujtaba Rahman, from Eurasia Group, warns that the government now faces a crisis beyond its control, creating significant challenges for the economy.
"The two areas Reeves has prioritized - the cost of living and interest rates - are now at heightened risk," Rahman adds. Despite these concerns, Reeves aims to project stability and continuity in her statement on Tuesday, following the turbulent period leading up to the autumn budget.
Reeves emphasizes the strength and security of the economy, citing falling inflation and interest rates, and improved living standards for working people across Britain. However, James Smith, chief economist at the Resolution Foundation, cautions that the Gulf crisis worsens the inflation outlook and increases cost-of-living pressures, especially if the conflict persists.
Before the US bombing campaign, markets anticipated an 80% chance of an interest rate cut at the Bank of England's next policy meeting on March 19. By Monday afternoon, that probability had dropped to just above 50%. Reeves and her team had pinned their hopes on further rate cuts to stimulate investment and consumer spending.
Chris Beauchamp, chief market analyst at IG, draws parallels with the oil and gas price surge following Russia's invasion of Ukraine. He warns that the current situation could dash hopes of easing pricing pressures and increased consumer spending, potentially disrupting plans for additional UK rate cuts.
The Liberal Democrats urge the chancellor to cancel the planned fuel duty increase in September, aiming to shield families from the potential impact of higher prices. Daisy Cooper, the party's Treasury spokesperson, emphasizes the need for Reeves to provide relief to families facing soaring fuel prices as a result of Trump's war with Iran.
Since the autumn budget, GDP growth has fallen short of expectations, with just 0.1% growth in the final quarter of 2025. However, recent business surveys suggest a more optimistic outlook. The OBR's forecast also considers the lower yield on UK government bonds since the budget, which benefits public finances by reducing the cost of borrowing for the Treasury.
Yet, even this positive development for Reeves is threatened by the Middle East conflict. There was a modest sell-off of gilts on Monday, pushing up 10-year yields by five basis points to 4.28%.
And this is the part most people miss: the intricate dance of economic policies and global events, where even the best-laid plans can be disrupted by forces beyond our control. It's a reminder of the complexity and unpredictability of our world. So, what do you think? Are economic plans ever truly immune to external shocks? Let's discuss in the comments!
