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Rising global energy prices driven by the expanding conflict in the Middle East are threatening to undermine Rachel Reeves’s efforts to bring down inflation and stimulate economic growth, economists have cautioned as she prepares to unveil her spring forecast.
In response to the latest outlook from the independent Office for Budget Responsibility (OBR), the chancellor is expected to argue that her government still has a credible economic strategy despite increasing global uncertainty. The updated forecasts are likely to indicate that the public finances remain broadly on course, with the £22bn fiscal headroom she built into her November budget largely preserved.
However, analysts warn that the OBR’s projections could quickly become outdated if the recent spike in oil and gas prices continues. On Monday, benchmark European gas prices jumped by more than 40%, while Brent crude oil rose by 6%, amid concerns about possible supply disruptions linked to the regional instability.
Mujtaba Rahman of Eurasia Group said the government now faces a major external shock just as the economy had begun to stabilise. He noted that the cost of living and interest rates — areas ministers have repeatedly highlighted — are now the most vulnerable to renewed pressure.
Despite the risks, Reeves aims to project a message of steadiness and consistency in Tuesday’s statement, following the turbulent period before last autumn’s budget. She is expected to stress that earlier policy decisions have strengthened the economy, pointing to declining inflation and interest rates as evidence that working households are seeing improvements.
Yet some economists remain sceptical. James Smith of the Resolution Foundation said the Gulf crisis has increased the likelihood of higher inflation and greater cost-of-living strains, particularly if the conflict drags on. Much will depend, he said, on how long the surge in energy prices lasts.
Financial markets have already adjusted their expectations. Before the US bombing campaign, investors had assigned an 80% probability to a Bank of England rate cut at its 19 March meeting. By Monday afternoon, that figure had fallen to just over 50%, reflecting renewed inflation concerns.
Reeves and her team had been counting on further rate reductions in the months ahead to boost business investment and consumer spending. However, Chris Beauchamp of trading platform IG warned that a sustained jump in energy prices — similar to the surge following Russia’s invasion of Ukraine in 2022 — could derail those hopes and create fresh challenges for policymakers and households alike.
The Liberal Democrats have called on the chancellor to scrap a planned fuel duty increase due in September, arguing that higher fuel costs would worsen the strain on families. Daisy Cooper, the party’s Treasury spokesperson, said it would be a mistake to press ahead with the rise at a time when global energy prices are climbing.
Economic growth has already been weaker than anticipated since the autumn budget, with GDP rising by just 0.1% in the final quarter of 2025. Although recent business surveys suggest a brighter outlook, uncertainty remains high.
The OBR’s assessment will also factor in lower yields on UK government bonds since the budget, which have reduced borrowing costs for the Treasury. However, that advantage may be short-lived. A modest sell-off in gilts on Monday pushed 10-year yields up by five basis points to 4.28%, highlighting the vulnerability of public finances to global market shifts.
