10 March 2026: The conflict has put the brakes on the next rate cut

Sir Keir Starmer admitted yesterday that Donald Trump’s war on Iran will rock Britain’s economy, as Rachel Reeves spoke of “months of upward inflation pressure”.

Every household and business could be hit if the Middle East conflict continues, the Prime Minister said, as oil prices soared above $100 a barrel for the first time since 2022.

With the Opposition Parties already calling for a vote on the Chancellor’s plans to increase fuel duty by 5p in the midst of the crisis, pressure is mounting on the Government to find ways to mitigate the looming impact on energy bills and petrol prices.

Energy prices are incredibly invasive. As the price of a barrel of oil reached $100 yesterday, there were warnings that its effect would reach into every corner of the economy, leaving Reeves with nowhere to hide.

Since the US and Israel began bombing Iran, triggering retaliatory attacks that have hit a string of countries across the Middle East, the average price of a litre of petrol in the UK has increased by 5p to 137.5p, while diesel is up 9p to 151p.

In a frank assessment, Starmer said: “It is important to acknowledge that work is needed, because people will sense that the longer this goes on, the more likely the potential for an impact on our economy, impact on the lives and households of everybody and every business.”

He insisted the economy was sufficiently resilient to absorb the “likely impact”. At the same time, Reeves declared: “I will take the necessary decisions to help families and businesses with the cost of living.”

But addressing MPs in the Commons after an emergency summit with G7 finance ministers, she warned: “The economic impact of the situation in the Middle East means it is likely to put upward pressure on inflation in the coming months.”

The Bank of England’s path towards a lowering of interest rates has also likely taken a major hit. With the MPC meeting next week, it is expected that there will be further caution expressed and the continuation of a wait-and-see view on a softening of monetary policy.

Should the war in Iran last longer than Trump expects and oil prices remain at or near the $100 level, it has been predicted that inflation in the UK could return to close to 5% by September. This would mean that wage increases will fall below inflation again, hitting consumer and household confidence hard.

G7 finance ministers met yesterday to discuss the effect on the global economy of a long, drawn-out conflict. The U.S. representative at the meeting may have felt pressure from the other six nations' representatives. Still, given Trump's apparently sanguine attitude to the cost of oil as the “price of beheading the Iranian monster”, he is unlikely to have made many new friends.

The pound reacted positively to the prospect of higher interest rates in the UK. It rallied to a high of 1.3448 and closed at 1.3420.

The oil price broke the $100 level yesterday as an Iranian missile hit Bahrain’s main oil terminal. While the damage was minimal, it closed oil production there and sent a shockwave through the markets, despite Trump’s comment that the war was “all but over” and Iran had very few missiles left. However, experts believe that Iran’s capability to manufacture missiles and drones has so far not been affected by the almost constant bombing by both the U.S. and Israel,l and the manufacture of further munitions is a relatively fast and efficient process.

As Trump continues to gaslight the global community, the announcement that the son of Iran’s assassinated Supreme Leader, Ali Khamenei, has been nominated to take his place shows that this war still has a long way to go. Mojtaba Khamanei has been described as the “power behind the robes”, and having seen his father, brothers and sisters killed by strikes that took place on the first days of the conflict, it is not expected to try to return Iran to the negotiating table.

The New York Fed survey, released yesterday, was conducted between February 2nd and 28th. ​As such, it does not capture the public’s reaction to surging oil prices that are the ⁠result of President Donald Trump’s war on Iran, which is massively disrupting global energy supplies.

Huge increases seen thus far in energy prices are almost certain to drive up already high levels of overall inflation and stand a good chance of pushing the public toward a less benign view of the outlook for price pressures over the coming years.

That would present a challenging environment for the Fed, which has been contending with high inflation for some time and a very slow retreat in price pressures back to the 2% target.

Fed Officials agree that where price pressures are expected to go exerts a strong influence on where ​they stand now, so if the oil shock creates expectations of higher price pressures, that could complicate efforts to get inflation back to ‌ target.

The ⁠New York Fed survey also found relative calm on the hiring front during February. In a landscape where the performance of the job market has grown decidedly lacklustre, survey respondents said last month they expect a lower future unemployment rate and a lower likelihood of losing jobs than in January. But respondents also said last month that finding new work would be harder than they believed at the start of the year.

The entire conflict is moving at such a pace that, even though economic data releases have become far more efficient in recent times, they cannot keep up in real time and are often out of date by the time they are published.

Over the past year, there has been a lot of talk about stagflation and the fact that such a state is “hard to achieve” without a significant turning point or a specific catalyst.

The conflict in Iran has provided such a state of affairs. As the Fed has been reluctant to cut interest rates because prices remained “sticky” around the 3% level, it has been unable to support growth as the jobs market has lost traction.

With the economy struggling to grow by around 2.5% this year, inflation is expected to rise due to higher oil prices, raising stagflation fears again.

The dollar index fell back to challenge its short-term support level yesterday amid worsening conditions in the Gulf. It reached a low of 98.71 and closed within two points of that level.

There has been a sharp reversal in Eurozone investor confidence, dropping from a positive 4.2 to a negative -3.1 this month. This marks the first negative reading in five months and indicates a significant decline in investors' economic expectations. The change suggests that any optimism from early 2026 is rapidly fading.

This negative sentiment contrasts sharply with the moderate optimism seen in late 2025 and points towards potential weakness in European equity markets.

The downturn occurs even as Eurozone inflation remains relatively contained, with the latest figures showing a year-on-year rate of 2.3%, down from the more volatile figures observed a year ago.

This indicates that the pessimism is not solely about inflation but also reflects broader concerns over economic growth and industrial output.

German Chancellor Friedrich Merz said yesterday that he was “concerned” about rising energy costs, as the Middle East war drove up oil prices and sent stocks plunging. “We know that this will have an impact on the German economy,” he added.

Merz repeated his strong criticism of Iran, describing it as “the centre of international terrorism,” and expressed support for the US-Israeli conflict against the Islamic Republic. “It is solely up to this regime and the so-called Revolutionary Guards to cease hostilities.

Until that happens, I assume that Israel and America will continue their offence against this regime,” the chancellor stated, adding that the sooner the mullah regime ends, the sooner this war will be over. However, the appointment of a new, potentially more hardline Supreme Leader will not promote any peace process.

Just a month ago, European Central Bank President Christine Lagarde declared that inflation was in a “good place.” With Europe now hurtling toward another energy crisis, traders are struggling to figure out how bad it could get.

At one stage yesterday, markets were pricing in two ECB interest rate hikes this year, before traders pared those bets when oil prices retreated from their highs. Driving the rapid fluctuations is uncertainty over how long energy prices will remain high, squeezing households and undercutting growth.

President Trump’s continued optimism about the end of the conflict gives traders a view that oil prices will decline quickly. Another oil depot at one of Iran's neighbours is hit, and the pessimism returns.

French President Emmanuel Macron on Monday pledged to defend Cyprus and to send additional warships to the Eastern Mediterranean to strengthen allies’ security in the region, amid growing concerns about the Iran war.

Macron said he was visiting Cyprus primarily to show solidarity with the country, where a Shahed drone struck a British air base on the southern coast last week. It was the first drone attack of the war on European territory.

“When Cyprus is attacked, it is Europe that is attacked,” Macron said after talks with his Cypriot counterpart Nikos Christodoulides and Greek Prime Minister Kyriakos Mitsotakis at Cyprus’s main air base near the southwestern town of Paphos.

“We are bound to one another by strategic partnerships.” Macron had ordered the French frigate Languedoc to waters off Cyprus, a fellow European Union member, to bolster its anti-drone and anti-missile defences. Last week, France also sent ground-based anti-drone and anti-missile systems. This will cause further embarrassment to the British Prime Minister, who has been accused of dilly-dallying over the defence of Cyprus.

The common currency is stuck in a relatively narrow range, driven by the contrasting reports emanating from Iran and the wider Arabian Gulf.

Until the citation calms down, the euro will experience higher-than-usual volatility, given that it makes up a significant part of the dollar index.

Yesterday, the Euro rallied to a high of 1.1638 and closed at 1.1635.

Have a great day!