The Chancellor’s call for NATO readiness is a familiar drumbeat, but the market is hearing a different tune. With Brent crude collapsing through $60 a barrel, the real story is not on the battlefield but in the balance sheets of oil-dependent states. Iran’s war costs are bleeding into global supply chains, and the City is pricing in a prolonged period of low energy prices.
This is a gift for importers, but a curse for the fiscal hawks in Whitehall. Every dollar fall in the oil price reduces tax receipts from North Sea production, widening the deficit at the worst possible time. Meanwhile, gilt yields are sliding as investors flee to safety, a move that smacks of desperation rather than confidence.
The Bank of England will be watching closely, but their hands are tied. Printing money to fund a war is not an option, not when inflation expectations are still anchored above target. This is a classic case of market discipline: if the government wants to spend on defence, it will have to convince the bond vigilantes that the sums add up.
So far, the arithmetic looks shaky. The pound is under pressure, capital flight is a real risk, and the only certainty is volatility. As I have said before, there is no such thing as a free fiscal lunch.
The cost of this conflict will be measured in higher borrowing costs, not just in casualties. The markets are not sentimental, and neither should we be.
