British PM Starmer calls emergency meeting on economy as Iran war risks mount

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MANCHESTER - British Prime Minister Keir Starmer is set to chair an emergency meeting on the economic fallout from the war in Iran on March 23, with Finance Minister Rachel Reeves and Bank of England Governor Andrew Bailey in attendance, the government said.

Investors are bracing themselves for another stormy week in financial markets after Iran said it would strike the energy and water systems of Gulf neighbours if US President Donald Trump follows through with a threat to hit Iran’s electricity grid.

Britain is watching with particular unease. The country’s heavy dependence on imported natural gas, persistently high inflation and stretched public finances have pushed its government bonds into a far steeper decline than those of international peers.

“Topics expected to be covered are the economic impact of the crisis on families and businesses, energy security and the resilience of industry and supply chains alongside the international response,” Britain’s Finance Ministry said ahead of the so-called “COBRA” meeting on March 23.

Foreign Secretary Yvette Cooper and Energy Secretary Ed Miliband will attend, as well as Mr Starmer, Ms Reeves and Mr Bailey.

Ms Reeves has said it is too soon to say what the impact of the war will be for Britain’s economy and has resisted calls for sweeping cost-of-living measures for households, saying instead that more targeted support is under consideration.

Inflation set to shoot higher

The energy price shock threatens to push Britain’s inflation rate back up – possibly to 5 per cent later in 2026, according to some economists – and deal another setback to the slow-growth economy.

It could also knock Ms Reeves’ efforts to repair the public finances off course if the oil and gas price surge is sustained and major support measures are required, possibly leading to more tax increases later in 2026.

Last week, the government launched a £53 million (S$90.6 million) package for homes that use heating oil to generate warmth.

But the pressure for wider measures has added to the unease of bond market investors.

On March 20, British 10-year government borrowing costs surged past 5 per cent for the first time since the global financial crisis almost 20 years ago.

Until last week, the majority of losses had been confined to short-dated gilts, which largely track interest rate expectations. Bets on the next move by the Bank of England have shifted violently towards interest rate hikes and away from the cuts that were expected until the eve of the war.

Last week, the central bank said it was ready to act to keep inflation on track for its 2 per cent target. Some policymakers said an increase in borrowing costs might be needed, but Mr Bailey said it was too soon to say that rates would have to go up.

The sell-off of longer-dated bonds as well as short-term debt suggests investors are starting to price in Britain’s fiscal vulnerability to the energy price shock.

“Developments over the weekend mean we are entering a new and very dangerous phase for financial markets,” said Mr Neil Wilson, UK investor strategist at Saxo Markets in London.

“The move in bond yields last week was material and has already added to stress in financial markets. Markets are pricing for a central bank response.” REUTERS