30 March 2026: Badenoch wants to see taxes on Energy bills cut before bailouts

The fiscal headroom, which the Chancellor proudly announced in her November Budget, has all but disappeared.

Less than a month ago, the Chancellor rose in the House of Commons to report that her headroom had even increased since November. She hoped that this generous cushion would free her from constant investor scrutiny, allowing her to spend the year focusing on tackling inflation and boosting growth.

But with both goals now seeming unlikely, Reeves’s financial breathing space is once again under threat.

Four weeks into the devastating conflict in the Middle East, the yield on 10-year gilts has risen to its highest levels since the global financial crisis of 2008, ending last week just short of 5%. This will increase the government’s borrowing costs and, by extension, the cost of almost everything, including everything it wants to do.

With oil prices increasing by around 50%, and other energy costs significantly more. Since the start of the war, as the effects have spread to other commodities, the rise in yields indicates higher expectations for inflation and interest rates. Investors who previously anticipated further rate cuts in the UK have significantly changed their stance, now forecasting rates to rise by at least 50 basis points this year as the Bank of England responds to escalating prices.

As several members of the Bank’s monetary policy committee appeared keen to hint last week, the markets might have gone ahead of themselves. Rate setters need to balance the risks of rising inflation against the economy's weakness. However, weaker growth, driven by a cost shock to the UK economy, will also affect the Office for Budget Responsibility’s forecasts for tax and expenditure, which are highly sensitive to small changes in the outlook.

One small ray of sunshine, if it can be called that, is that the downturn in economic activity caused by the rise in energy prices may result in inflation increasing by less than anticipated.

Former Bank of England Chief Economist Andy Haldane told reporters on Friday that he still believes rate cuts are more likely than hikes, describing any hike this year as “relatively unlikely.”

Soaring energy prices have drawn comparisons between the crisis and the spike seen after Russian tanks entered Ukraine in 2022, causing inflation to spiral towards double figures.

Back then, the Bank of England faced criticism for being too sluggish to raise rates.

But Haldane said: ‘This time is different. Then demand was strong; now demand is weak. I’m not expecting the same inflation pressures remotely that we had back then.

‘So there’s no immediate cause for the Bank of England to be slamming on the brakes with higher interest rates.’

Back in 2022, inflation stood at more than 6%, almost twice its current level, even before the war in Ukraine erupted. The base rate stood at 0.5%, compared to 3.75% today.

Meanwhile, the Opposition Leader told the BBC yesterday that drilling for more oil and gas in the North Sea would reduce energy bills, despite evidence from industry experts that it would make no difference to prices. The Labour Party claims that more drilling in the North Sea won’t lower bills by even a penny. This is nonsense, she told Laura Kuensberg.

The industry just needs the Government to step aside and let them drill. Conservatives are campaigning to Get Britain Drilling.”

However, industry experts, including the chair of the transition investment vehicle GB Energy, Juergen Maier, have argued that producing more oil will not reduce bills, as it would be sold on international markets that set the price.

Vested interests drive both arguments, but it is unlikely that Labour would reverse its energy policy even as oil prices continue to surge, so Badenoch’s comments will be seen as little more than campaigning for the upcoming May elections.

Sterling suffered last week from a fall in risk appetite as Trump continued to make ambiguous statements about the war in Iran. The pound fell to a low of 1.3252 and closed at 1.3260.

Officially, Federal Reserve policymakers still project interest-rate cuts later this year, but listen carefully, and a different message emerges. With inflation driven by tariffs and energy, and the labour market soft but not collapsing, some officials are hinting that their next move could be either higher or lower.

It is a subtle but significant shift. As recently as a few weeks ago, the path looked firmly downward. But in the past week, many officials have sounded hawkish notes. Governor Lisa Cook, who consistently votes with the Fed’s majority, said that as higher energy prices from the war in Iran add to price pressures, prolonged inflation is again the dominant risk the Fed faces.

Chicago Fed President Austan Goolsbee became one of the first officials to mention the possibility of an increase explicitly. “We could be back to the era of multiple rate cuts for the year, if inflation behaves,” he told CNBC. “But I could see circumstances where we would need to raise rates.”

A rate increase remains unlikely. But even raising the possibility is noteworthy. At the Fed’s past two meetings, officials decided against publicly stating that the next move could be upward, Chair Jerome Powell said this month.

Even if rates do not rise, the likelihood is growing that the sequence of six rate cuts starting in September 2024 has now ended.

Shifting perceptions of the Fed explain why longer-term interest rates have risen sharply since the war with Iran began. Traders have raised their expectations for future rates and priced in a small possibility of a rate hike this year.

As these expectations are reflected in bond yields, businesses and households feel the effects immediately, including higher mortgage rates.

Officials sometimes resist market pricing that conflicts with their own expectations. However, because the Iran conflict has increased their inflation concerns, the Fed has little reason to oppose it now. Market observers noted that the market’s new expectation of steady or higher rates going forward is favourable to the Fed.

The Senate Banking Committee is preparing to hold a confirmation hearing for Federal Reserve chair nominee Kevin Warsh as early as the week of 13 April, setting the stage for a crucial debate on the future direction of US monetary policy amid increasing economic uncertainty. Plans for the hearing follow weeks of political friction that have stalled Warsh's nomination in the Senate.

The delay has kept current Federal Reserve chair Jerome Powell in place, even as President Donald Trump continues to push for a successor more inclined toward faster interest-rate cuts.

Addressing a Saudi Arabia-backed investment conference in Miami on Friday, US President Donald Trump insisted his Make America Great Again political movement was “stronger than ever”. Trump has, for weeks, maintained that the ardent base of supporters who delivered him another four years in the White House is united behind his decision to wage war in Iran.

But as the conflict in the Middle East enters its second month, the Pentagon sends thousands of additional troops to the region, and global markets remain in turmoil, there are signs that even the president’s most fervent supporters are becoming cautious of what he claimed would be a “little excursion”.

The dollar managed to close above the crucial 100 level last week, which should encourage technical buyers to “dip their toes into the water” again. It reached a high of 100.21 and closed at 100.19.

European Central Bank board member Isabel Schnabel has warned against rushing to raise interest rates to counter the current surge in inflation. During a university lecture in Zürich, Schnabel stressed the importance of carefully analysing whether the inflation spike is becoming ingrained before acting. Policymakers are currently debating whether to raise rates to curb rapid price increases or to treat the shock as temporary.

Schnabel, regarded as a hawkish member of the ECB’s Governing Council, stated that there is no need for immediate action.

She emphasised that the ECB has time to evaluate incoming data and identify the presence of second-round effects, the strength of demand, and the likelihood of the inflation shock becoming ingrained in inflation expectations and wage growth.

Financial markets expect three interest rate increases from the ECB this year, possibly beginning in April or June.

She argued that the current situation differs from the past, citing higher interest rates, reduced fiscal policy support, a lack of pent-up demand, and a shift in the supply-demand balance. She believes this provides the ECB with the chance to carefully analyse the situation before making any decisions. However, she acknowledged that the energy shock could lead to lasting inflation.

Schnabel affirmed that the ECB would take action if a more persistent impact on inflation arises, reiterating the bank’s commitment to acting decisively when necessary, as it did during the previous inflation surge. She stated that monetary policy would need to respond if there is a sustained impact on inflation, and it will act decisively.

Such a progressive attitude from the ECB’s “Chief Hawk” could propel her back into the race to replace Christine Lagarde as President of the ECB when she eventually departs. However, her nationality will likely still hold her back.

European government bonds continued to decline on Friday, extending a rout that has caused borrowing costs in several countries to reach multi-decade highs in recent weeks.

Thursday saw the yield on Germany’s ten-year bonds, a benchmark for the euro zone, surge to the highest level since mid-2011 at the height of the euro crisis. On Friday morning, it added a further 6 basis points, trading at 3.1228% and maintaining its position above that 15-year high.

Yields on French government bonds also increased further on Friday, with the country’s 10-year bond rising by 9 basis points to reach its highest level since 2011. The previous day, the 10-year gained approximately 14 basis points.

It is interesting to note that, with German regional Inflation data due for publication later this morning, even in the Eurozone’s largest economy, there are large variations in inflation rates, with only one region (Brandenburg) having the same rate as the ECB maintains for the entire Eurozone.

The Euro suffered at the hands of a resurgent dollar last week, falling to a low of 1,1484 and closing at 1.1509.

Have a great day!