The UK is at Risk of Inflation and Energy Spikes Due to the Iran Conflict
Rising Borrowing Costs and Market Volatility
The United Kingdom’s borrowing costs are going up with great rapidity as the country is exposed to a surge in inflation due to the current war in the Middle East between Iran, the United States and Israel. The potential inflation crisis has been reflected in the UK’s increased cost of borrowing as the benchmark 10-year Gilt* yield rose 10 basis points on Friday 6th March.
*10-year Gilt (Government Bond) – Represents the yield/interest rate the government must pay to borrow money for ten years. It is referred to as the benchmark as it reflects investor sentiment on the health of the UK economy and future Bank of England policy decisions.
Energy Security and Domestic Policy Vulnerability
The UK’s Energy Secretary, Ed Miliband, said that after an extremely serious drop-off in tankers transiting the Strait of Hormuz, the country is now at the mercy of international energy markets.
The Iran crisis has exposed significant vulnerabilities in the Labour government’s energy strategy. By retreating from North Sea oil in favor of current green policies, the UK’s heavy reliance on imported fuel has been thrust into a harsh spotlight. Whilst the costs will not be seen by household bills immediately, the inevitability of upcoming increases will soon filter through leaving residents of the UK further out of pocket.
Impact on Petrol and Diesel Prices
At the pumps, diesel has surged to a 16-month high, rising by approximately 6p to 148p per litre, a level not seen since August 2024. Petrol prices followed suit, climbing by 4p to an average of 137p. For the average consumer, this translates to an additional £2.00 to fill a 55-litre petrol car, while diesel owners are facing an increase of roughly £3.30 per tank.
Shifting Expectations for Bank of England Policy
Elsewhere, analysts report a significant shift in expectations for the Bank of England’s March 19th policy meeting. While markets were previously almost certain of a 25-basis point cut, the ongoing conflict has prompted a major reprice, with holding interest rates now seen as the most likely outcome. Experts advise that due to the surge in energy prices, inflation could return to 3.5% later in the year, and if Brent Crude continues to increase (up circa 27% last week), the cost of living for consumers will continue to increase.
