For Starmer’s government — headed for potentially brutal local elections in May — the crisis in the Gulf risks a nightmare combination of a rise in energy prices, interest rates, inflation and the cost of government borrowing that threatens to undermine everything he’s done since winning office.
Economists are now warning that even if Donald Trump’s promise of a “complete and total resolution of hostilities” with Iran were to bear fruit, the effects on the British economy could still last for months.
Already there are signs of a split within Starmer’s party over how to respond. Labour MPs want the government to think seriously about action to protect households — but Starmer and Reeves have long talked up the need for fiscal responsibility, and economics are warning that there’s little room for maneuver.
Jim O’Neill, a former Treasury minister who served as an adviser to Reeves, told POLITICO the government should “not get sucked into reacting to every external shock” and “concentrate on boosting our underlying growth trend.”
Why the UK is so hard hit
Just before the outbreak of war, there was reason for Starmer and Reeves to feel quietly optimistic about the long-stagnant British economy. The Bank of England had expected inflation to fall back sustainably toward its two percent target for the first time in five years, giving the central bank the space to carry on cutting interest rates.
With the Iran war in full flow, it was forced to rewrite those forecasts at the Monetary Policy Committee’s meeting last week — and now sees inflation at around 3.5 percent by the summer.