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Soaring global energy prices as a result of the widening Middle East conflict will jeopardise Rachel Reeves’s plan to conquer inflation and rekindle growth, economists have warned as she prepares to deliver her spring forecast later today.
Responding to the latest projections from the independent Office for Budget Responsibility (OBR), the chancellor will insist she has “the right economic plan for our country, in a world that has become more uncertain”.
The new forecasts are expected to show the public finances moving in the right direction, with the £22bn fiscal buffer she left herself against her fiscal rules in the November budget little changed.
However, experts said the OBR projections could soon look out of date, if Monday’s surge in oil and gas prices proves long-lasting.
Benchmark European gas prices were up by more than 40% on Monday, and the price of a barrel of Brent crude oil surged by 6%, amid fears about supply disruptions.
“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,” said Mujtaba Rahman of the consultancy Eurasia Group.
“The two areas they’ve trumpeted the most are the cost of living and interest rates, and those are the two areas of the economy that are now most at risk.”
Nevertheless, Reeves hopes to project stability and continuity at Tuesday’s statement, after the tumultuous run-up to last autumn’s budget.
She will insist that “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.”
But James Smith, the chief economist at the Resolution Foundation thinktank, said that as a result of the Gulf crisis “the inflation outlook is higher; the cost of living pressures are greater – particularly if the conflict continues for any length of time. It depends on how permanent it all turns out to be.”
Before the US bombing campaign began, markets were pricing in an 80% chance of an interest rate cut at the Bank of England’s next policy meeting on 19 March. By late afternoon on Monday that had dropped to just above 50%.
Reeves and her team have been pinning their hopes on more rate cuts in the coming months, to encourage companies to invest and consumers to spend.
Chris Beauchamp, the chief market analyst at the trading platform IG, compared the current situation to the dramatic run-up in oil and gas prices that followed Russia’s invasion of Ukraine.
“Hopes that pricing pressures would ease and consumers could spend more could be dashed, as a price spike similar to 2022 causes a major headache for both policymakers and consumers, potentially disrupting the plan for more UK rate cuts,” he said.
The Liberal Democrats urged the chancellor to cancel September’s planned increase in fuel duty, to cushion the potential blow from higher prices.
Daisy Cooper MP, the party’s Treasury spokesperson, said: “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.”
Since the autumn budget, GDP has turned out weaker than expected, with growth of just 0.1% in the final quarter of 2025; but recent business surveys have pointed to a more positive outlook.
The OBR’s forecast will also take into account the lower yield – effectively the interest rate – on UK government bonds since the budget, which helps the public finances, by making it cheaper for the Treasury to borrow.
This movement in Reeves’s favour also appears at risk from the Middle East conflict, however. There was a modest gilt sell-off on Monday, pushing up 10-year yields by five basis points, or 0.05%, to 4.28%.
