Key events
Jeremy Hunt: Markets wouldn’t allow a repeat of the 2022 energy price cap
Jeremy Hunt, the former chancellor of the exchequer, says Rachel Reeves faces an ‘incredibly challenging’ situation, as the Iran war hits UK living standards.
Hunt, who was chancellor from October 2022 to July 2024, says Resolution Foundation’s new analysis “brought back a few nightmares” for him.
But, when Hunt became chancellor, the energy price cap was predicted to be £4,200; instead, bills were capped it at £2,500 a year, a move that drove up the UK national debt.
Hunt argues that even with all the worries today, the scale of what the UK is facing now is “nothing like 2022”.
We’re talking about potentially a £300 rise in energy bills, not an increase in energy bills by £2000, or £2,500, a year. So the scale is very, very different at the moment.
Hunt also argues that the markets wouldn’t allow the kind of intervention that he was able to do in 2022.
He says that concerns about the UK’s national debt are higher today:
The markets have noticed that debt interest is now £110bn a year. If you add to that, the unfunded liabilities for civil service and NHS pensions, we pay in tax every year the equivalent of £0.19 on income tax just to pay for government liabilities, debt, interest £0.19 a year added to our income tax bills. That is huge.
Resolution Foundation: pressure on UK housing costs from Iran war
The Iran war is putting rising pressure on UK housing costs, the Resolution Foundation are warning.
The think tank is presenting their new research on the impact on living standards (see earlier post) at an event in London now.
Jonny Marshall, principal economist at Resolution Foundation, points out that expectations this year of continued interest rate cuts have faded.
Marshall says:
This is very unwelcome news to the nearly three quarters of a million households that are set to come off five year fixed mortgages this financial year.
For a household with a loan of around £220,000 pounds, moving off a cheap fix would add about £350 to their housing costs, a rise of more than £100 if that cheap fix had ended at the start of February.
There are also expectations that higher mortgage rates could feed through into rental prices, he adds.
Marshall also pointed out that petrol and diesel prices have jumped rapidly, while food inflation will rise more slowly – it typically takes a year for a food commodity price shock to feed through to the peak of food price inflation.
And with households facing a jump in energy bills this year, Resolution argues that any government support should be targeted at those most likely to struggle with higher costs.
Markets dip ‘before Trump inevitably TACOs again’
European stock markets have dropped this morning, but it’s a rather modest sell-off.
Germany’s DAX has dropped by almost 1%, while Spain’s IBEX is down 1.2% and Italy’s FTSE Mib has lost 0.75%.
This mild reaction may indicate that investors aren’t intensely worried about Donald Trump’s threat to close the strait of Hormuz.
As Bill Blain, principal of Wind Shift Capital Advisors, puts it:
More instability forecast before Trump inevitably TACOs again. Markets are getting bored of it – which means the consequences could be even more volatile!
The US blockage on Iranian ports, which is scheduled to start at 3pm UK time, will be a blow to China, which is a key buyer of Tehran’s oil.
Neil Wilson, investor strategist at Saxo UK, explains:
After the ceasefire and move towards peace talks, the failure of negotiations and President Trump’s subsequent decision to impose a naval blockade on the Strait of Hormuz has sent oil prices sharply higher this morning with Brent futures trading north of $100 again.
The US Navy will block the Strait from 10am eastern time today after Washington and Tehran failed to reach agreement over the weekend – I thought we wanted it open!? Brent rose about 8% to clear $103 before paring gains to trade about the $101 mark. Dutch TTF gas jumped about 8% also.
The main thing to consider is China as the main customer of Iranian oil – the blockade appears to be a tool to pressure China to strong arm its strategic partner to hurry up and do a deal. Diplomacy is the continuation of war by other means in this case.
UK mortgage rates have dipped slightly today.
The average 2-year fixed residential mortgage rate today is 5.89%, down from 5.90% on Friday, data provider Moneyfacts reports.
The average 5-year fixed residential mortgage rate today is 5.77%, down from 5.78% at the end of last week.
That follows a drop in borrowing costs at the end of last week, on hopes that last weekend’s peace talks might have delivered progress.
With government borrowing costs a little higher this morning, it’s possible that tomorrow’s Moneyfacts data will show mortgage rates have gone up again!
Germany will cut taxes on diesel and petrol for two months, chancellor says
Germany is rolling out support for consumers and businesses facing higher motor fuel costs.
Chancellor Friedrich Merz has announced that petrol and diesel taxes will be cut for two months to provide relief to households and businesses hit by the energy shock during the Middle East war.
Merz told a press conference:
“We will reduce… the fuel tax on diesel and gasoline by approximately 17 (euro) cents per litre for two months.”
Julia Kollewe
Rachel Reeves said she would set out a support package this week to help businesses struggling with soaring energy costs as a result of the Iran war.
Like other countries, the UK is exposed to the economic fallout from the Iran war, which has driven oil and gas prices sharply higher on world markets, thereby increasing energy bills and fuel prices for households and businesses.
Crude oil prices spiked to nearly $120 a barrel during the war, but fell below $100 a barrel last week after the US and Iran agreed a temporary ceasefire. However, they are expected to rise again on Monday after the two countries failed to reach a deal to end the war over the weekend.
Writing in the Sunday Times, the UK chancellor said:
“The war in Iran will come at a cost to British families and business… We don’t yet know the full scale of those costs, but the immediate priority must be to ensure that the ceasefire holds.”
She added:
“That is the best protection we have against higher costs at home and at the IMF meetings in Washington this week I will be working with allies on the action we can take to guarantee freedom of navigation, including the Strait of Hormuz, to keep energy supplies moving again.”.
She and other finance ministers along with central bankers are heading to Washington for the International Monetary Fund and World Bank’s spring meetings starting on Monday.
The UK government had been waiting to see how the conflict evolved before announcing support to households and businesses. It has already pledged to cut some green levies and lower bills for some electricity-intensive companies. Reeves said:
“The UK’s manufacturing sector… has faced uncompetitive energy prices for too long.
“So later this week I will be setting out the next phase of our plans to boost Britain’s competitiveness. I will also set out the principles that will guide how we support businesses in the months ahead.”
Higher energy prices will increase the pressure on central banks to tighten monetary policy, to prevent a surge in inflation.
This morning, City investors are pricing a roughly 84% chance that the Bank of England raises interest rates twice this year, Reuters reports, up from a 60% chance on Friday.
Airline stocks hit by conflict worries and higher oil
Shares in European airlines are dropping in early trading, amid disappointment that the talks between Washington and Tehran broke up without a breakthrough last weekend.
British Airways’ parent company, IAG, are down over 2% this morning, with budget rivals Wizz Air (-6.5%) and easyJet (-3.8%) falling more sharply.
In Germany, Lufthansa has dropped by 4%.
FTSE 100 drops
London’s stock market has opened with a bump, as traders react to the lack of progress in the US-Iran peace talks.
The FTSE 100 index of blue-chip shares has lost 0.6% at the start of trading, falling by 67 points to 10,533 points.
AB Foods (the grocery, sugar, agriculture, ingredients and retail group) are the top faller, down 2.7%, with airlines, miners, banks and housebuilders all lower.
Energy companies are rallying, though; BP and Shell are both up more than 1%.
Energy shock to wipe out growth in UK living standards
The surge in energy costs from the Iran war will cost a typical UK household almost £500, new research from the Resolution Foundation shows.
The Resolution Foundation have esimated that rising energy prices are likely to tip living standards growth into negative territory this year.
That’s because the increased cost of energy bills and petrol at the pump will almost certainly be passed onto households.
The typical household is now set to see its income fall by 0.6% – a difference of £480 – over the course of the current financial year, they say, Before the conflict, they were on track for 0.9% growth.
Average income growth for the poorest fifth this year is now set to be just 1.2%, down from 2.8% before the conflict.
James Smith, chief economist at the Resolution Foundation, says:
“Despite hopes for a sustained peace, the path of this conflict remains uncertain and energy prices remain well above pre-war levels, meaning many households face a decline in their purchasing power this year.
“This squeeze will run right through the income distribution. Lower-income households will still see some income growth thanks to a long-awaited rise in real benefit levels, but inflation will likely knock more than a percentage point off what they stood to gain. For those in the middle and towards the top of the income distribution, even the thin growth they had been expecting has tipped into negative territory.
“Deescalation is certainly welcome, but damage to household finances this year is to a large degree already done. The Government should act now to prepare a social tariff that reaches households falling through the cracks this winter.”
Heathrow Airport has warned that the outlook for the next few months is uncertain, due to the ongoing conflict in the Middle East.
In its latest traffic commentary, Heathrow says it is supporting airlines and passengers as they adapt to airspace closures, adding:
The knock-on impacts to global supply chains, including fuel, have not affected airport operations. Heathrow will monitor the situation and liaise with Government and airlines to protect passengers’ journeys.
The US dollar is rallying as a sharp risk-off move ripples across markets.
The dollar index, which tracks the greenback against a basket of other currencies, has gained 0.35% this morning.
The pound is down half a cent, to just above $1.34.
UK gas price jumps
The price of wholesale gas has also risen this morning.
The month-ahead US gas contract is up 9% to 119.50 a therm, its highest level since last Tuesday (before Donald Trump announced the two-week ceasefire with Iran).
Before the conflict began at the end of February, gas was trading below 80p a therm, before hitting 180p/therm in mid-March.
Analyst: oil remains vulnerable to geopolitical triggers.
Every barrel of risk added to oil markets carries an inflation price tag for the global economy, warns Priyanka Sachdeva, analyst at brokerage Phillip Nova:
Oil markets have decisively re-entered geopolitical mode, with prices vaulting back above the psychological $100 per barrel threshold as the United States moved to impose a naval blockade targeting Iranian shipping through the strait of Hormuz.
Both benchmarks, WTI and Brent, opened gap-up and currently hover with almost 8% gains. The market reaction underscores a simple but powerful reality: Hormuz risk is not theoretical; it is structural, and it is real.
The latest catalyst came after talks mediated by Pakistan failed to produce a durable agreement, prompting the U.S. to announce enforcement of maritime restrictions on vessels moving to and from Iranian ports. The mere threat of enforcement alone has been sufficient to re-price risk, demonstrating how vulnerable oil remains to geopolitical triggers.
Only mild losses in Asia-Pacific markets after peace talks break down
The breakdown of US-Iran peace talks last weekend has only led to modest losses in Asia-Pacific markets.
Japan’s Nikkei index is down 0.75%, while Hong Kong’s Hang Seng index and the South Korean KOSPI have both dropped by 1.15%.
Michael Brown, senior research strategist at brokerage Pepperstone, says:
While crude has advanced, and stocks slipped a touch, the overall market reaction to the weekend news of a US Navy blockade of the strait of Hormuz has been relatively contained, as participants view the move largely as a negotiating gambit from President Trump.
While it’s clearly a risk-averse start to the trading week, amid President Trump’s announcement of a Navy blockade in the strait of Hormuz, the general market reaction can be summed up as ‘could be worse’.
The US blockade of the strait of Hormuz is a blow to the 20,000 seafarers who have been trapped in the Gulf for the last six weeks.
One told us last week:
“I gave my notice exactly one month ago. I’ve informed the master, I’m not willing to sail through the strait. It’s about safety, it’s all about safety.”
Introduction: US blockage threat puts oil back over $100
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We start a new week, again, with an escalating conflict in the Middle East, after the collapse of US-Iran peace talks last weekend.
Donald Trump’s threat to impose a blockade on the strait of Hormuz has driven the oil price back over $100 a barrel again this morning, as hopes of an end to the conflict soon take another knock.
Brent crude, the international benchmark, has jumped by 7% to $101.88 a barrel, while US crude is up over 8% to $104.69 a barrel – back towards the highs of almost $120 set early in the conflict.
The US president also said he had asked the US Navy to “interdict” any ship that had paid a toll to Iran for passage through the strait, in an attempt to choke off the flow of Iranian oil.
Tony Sycamore, market analyst at IG, says:
By doing so, the US aims to force Tehran’s allies and customers to put pressure on Iran to reopen the vital chokepoint, potentially resolving the impasse without committing ground forces to another protracted conflict.
This approach will undoubtedly strain Iran’s relationship with its largest customer, China. Having already lost Venezuelan supply earlier this year, Beijing now faces the potential loss of another roughly 2m barrels a day.
The war has already driven confidence across Britain’s biggest companies down to a six-year low.
Deloitte’s quarterly survey of chief financial officers has found that concerns around energy prices, inflation and interest rates surging after the Middle East conflict, to its lowest level since early in the Covid-19 pandemic in 2020.
