In a speech aimed at calming markets, Britain’s Chancellor of the Exchequer Rachel Reeves outlined a plan to stabilise the economy amid escalating global geopolitical turmoil. Reeves stressed that the government’s current approach is essential to protect citizens from external shocks, even as she has had to lower Britain’s economic growth forecast to 1.1% for 2026.
The UK economy is at a critical juncture due to the conflict in the Middle East. The war has caused global oil prices to jump 15% and wholesale gas prices to double. This indirectly threatens to push up domestic inflation, which is already high compared to other G7 partners.
The immediate reaction of the market was seen in the rise in UK government bond yields, reflecting investor concerns that high energy costs will prevent the Bank of England from cutting interest rates this year. This could be a blow to homeowners and businesses hoping for an easing in borrowing costs in the near future.
Reeves has also been critical of the previous Conservative administration, and is promoting a new vision that emphasises policy sustainability. He hopes that closer trading relations with the European Union and reforms to tackle youth unemployment will convince the private sector to return to investing in the UK despite complaints about the high tax burden.
From a fiscal perspective, Reeves still has some breathing room with £23.6 billion to meet his fiscal targets. However, this space could be eroded rapidly if the government has to deal with new energy subsidies or if bond yields continue to rise due to global uncertainty.
The political stability of Keir Starmer’s administration is being tested to its limits. Recent by-election defeats and pressure from consumer groups to maintain a fuel duty freeze have put the government on the defensive. The focus now turns to how Reeves and Starmer will balance fiscal discipline with public demands ahead of local elections in May.
