The City woke to the sound of sabre rattling this morning, but the real noise came from the Gulf. After an attack on a British-linked cargo vessel in the Strait of Hormuz, the United States launched retaliatory strikes against Iranian targets. The message from Downing Street was clear: Britain stands resolute. But as a financial editor who has seen the cost of war written in red ink, I find myself wondering who will pay the bill.
Let’s start with the immediate market reaction. Oil prices spiked 3% at the open, with Brent crude flirting with $90 a barrel. The FTSE 100, heavily weighted towards energy and defence, will likely absorb the shock, but the broader story is one of volatility. The sterling, already struggling under the weight of a stagnant economy, took a hit against the dollar. Currency traders are pricing in risk, and risk means capital flight.
The attack on the cargo ship, a vessel with British commercial interests, was a direct challenge to the principle of free navigation. The US response, while predictable, raises the stakes. Iran’s proxies in the region have been emboldened, and the Strait of Hormuz is the world’s most important oil chokepoint. Any disruption there sends shockwaves through supply chains, inflation expectations, and ultimately, the cost of living for British households.
Now, let’s talk about fiscal responsibility. The government is already spending beyond its means, with gilt yields creeping up as bond markets grow nervous. A sustained military engagement, even a limited one, requires resources. The Treasury will have to choose between higher borrowing, which pushes yields higher, or cutting elsewhere. Neither option is palatable for a Chancellor facing an election.
There is also the question of market efficiency. The US strikes were surgical, aimed at precision targets, but the risk of escalation is real. Markets hate uncertainty, and the Middle East is a cauldron of unpredictability. The VIX, Wall Street’s fear gauge, is edging higher. London’s insurance market, Lloyd’s, will be calculating the risk to shipping premiums, which are already at elevated levels.
What about the Bank of England? Andrew Bailey will be watching these developments with concern. Inflation is sticky, and any rise in energy prices will feed through to consumer prices. That means interest rates might stay higher for longer, choking off the fragile recovery. The central bank’s dual mandate of price stability and growth is being tested.
There is a cynical view in the City that conflict can be good for business. Defence stocks are up, oil majors are up, and traders are making a killing on volatility. But that ignores the human cost and the long-term damage to trade and investment. The UK’s trade with the Gulf is worth billions, and any disruption hits both exports and imports.
In conclusion, Britain stands resolute, but the financial markets are a brutal judge. The cost of this resolute stance will be measured in higher prices, higher risk premiums, and a slower economy. The government must be clear-eyed about the trade-offs. The bottom line is that every missile fired has a price tag, and it is ultimately the taxpayer who signs the cheque.
