The spectre of armed conflict in the Middle East has crashed into British household finances with the force of a rogue wave. Energy bills, already stubbornly high, are now pricing in a geopolitical risk premium that would have seemed unthinkable a year ago. The trigger: escalating rhetoric and military posturing between Iran and its adversaries, threatening the Strait of Hormuz, the world's most critical oil chokepoint.
For the City, this is a textbook case of tail risk materialising. The probability of a supply disruption has been repriced from negligible to palpable. Brent crude surged past $95 a barrel in early trading, a level not seen since the energy crisis of 2022. UK natural gas futures followed suit, spiking 12% on the day. The knock-on effect on consumer energy tariffs will be immediate. Ofgem's price cap, already set to rise in April, now faces further upward pressure. The market is effectively placing a bet that the government will have to intervene, but fiscal headroom is scarce.
This crisis exposes the fundamental vulnerability of the UK's energy mix. Despite progress on renewables, Britain remains a net importer of natural gas and relies on global spot markets. When the world goes cold or warlike, the bills come home. The government's strategy of 'decoupling' from Russian gas has succeeded only in swapping one set of geopolitical dependencies for another. Now, every Iranian missile test sends a shudder through the UK's energy supply chain.
Market volatility is the new normal. The VIX, Wall Street's fear gauge, is elevated. Gilt yields are rising, a reflection of both inflation expectations and the increasing risk premium the market demands for holding UK debt. The pound is under pressure, making imports more expensive. It's a perfect storm for the Bank of England. Rate setters must now weigh the inflationary impulse from energy costs against the clear risk of recession. The last time they faced such a trade-off, they blinked. This time, the stakes are higher.
Capital flight is another concern. Investors are rotating out of risk assets and into safe havens. UK equities, particularly those exposed to consumer discretionary spending, are taking a hit. The FTSE 100, heavily weighted towards oil and mining, has held up, but the broader market is feeling the pinch. The real economy, meanwhile, is absorbing the shock. Businesses face higher input costs, consumers are cutting discretionary spending, and the housing market is showing signs of strain. Mortgage rates, which had started to ease, are now ticking higher again.
There is a bitter irony here. The government's much-vaunted 'war on inflation' is being undermined by a war on the other side of the world. The Bank of England may have to choose between its mandate and market stability. My advice to the Chancellor: prepare a contingency fund for energy bill support, and pronto. The Treasury will hate it, but doing nothing will cost more in the long run.
The markets are sending a clear signal. The question is whether the politicians are listening. For now, all eyes are on the Strait of Hormuz and the next diplomatic move. But make no mistake: the bottom line for British households is getting bleaker by the hour.
