Stock markets around the world have turned bearish as the conflict between the United States and Iran intensifies, raising fears of a “prolonged war” that could stifle global economic growth. In the UK, Chancellor Rachel Reeves warned that the hostilities are likely to disrupt the downward trajectory of inflation, potentially leading to a “cost-of-living shock.” The instability comes at a sensitive time for the British economy, which has only recently begun to stabilize after years of high prices.
The core of the market’s anxiety lies in the Strait of Hormuz, where Iran has signaled it may restrict the transit of natural gas and oil. This geographic “choke point” is vital for the UK’s energy imports, and any prolonged disruption could lead to a significant increase in the price of heating and electricity. Iranian security chief Ali Larijani explicitly linked the safety of the passage to the cessation of US and Israeli military actions in the region.
In the face of these threats, the Bank of England is expected to keep interest rates steady until at least 2027, a move that will impact mortgages and business loans across the country. This shift in expectations reflects the consensus that energy-driven inflation will remain a persistent threat for several years. The “higher for longer” interest rate environment is now being viewed as a necessary defense against the inflationary pressures of the war.
On the home front, the government is facing pressure from both sides of the aisle. The Trades Union Congress has urged the administration to “pull out all the stops” to shield workers, while the Conservatives are planning to challenge the Chancellor on fuel duty. Reeves has responded by focusing on market oversight, ordering a crackdown on any firms found to be profiteering from the crisis at the expense of the British taxpayer.
While there was a brief moment of relief as Brent crude prices fell back below $90, the situation remains highly unpredictable. The appointment of Mojtaba Khamenei in Iran suggests a potential hardening of Tehran’s stance, making a “rapid de-escalation” more difficult to achieve. As the government prepares its next move, the British public is left to manage the immediate impact of rising costs and market volatility.