The pound teetered on Tuesday as the rapidly escalating crisis in the Middle East ripped its way through commodities and into currencies and government debt.
Sterling fell to its lowest level against the US dollar since early December. Gilt yields meanwhile shot up, making borrowing more expensive and threatening to undo much of the government’s recent progress on spending.
Rachel Reeves must have been cursing her luck. In truth, the timing of this year’s spring statement couldn’t have been much worse. The chancellor delivered a cautious statement to parliament amid bubbling market turmoil, opting against announcing any new policies and focusing on the fiscal headroom.
The Office for Budget Responsibility (OBR) issued updated economic forecasts alongside her address. The OBR downgraded its 2026 growth projections from 1.4% to just 1.1% and now expects unemployment to peak higher. At the same time, it reduced its government borrowing forecast by £6bn for this year and said borrowing as a percentage of GDP would fall faster than expected. Crucially, those assessments were made before the air strikes began at the weekend.
But perhaps the most significant correction was in the Bank of England’s outlook for the remainder of this year. We haven’t heard much from the Bank this week, but financial markets sharply adjusted their interest rate assumptions for this year. As of yesterday evening, they now expect just one cut across the whole of 2026, down from at least two at the start of the week.
The conflict in the Middle East snowballed yesterday. Israel and the United States attacked Iran-supporting targets in Lebanon, while US diplomats warned of an attack on the headquarters of the Saudi state oil company, Aramco.
Stocks fell again across the globe while Brent crude zipped up towards $85 to the barrel. Some analysts believe this could reach $100 in the coming months, a scenario that would materially impact the inflation outlook across the UK and Europe.
Consumer price inflation unexpectedly climbed to 1.9% in the eurozone last month. That leant more credence to the hawkish narrative for the European Central Bank that has built since the outbreak of the conflict.
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