A sharp decline in global oil prices has handed the UK Treasury an unexpected windfall, as falling energy costs dampen inflation expectations and open the door for a more expansive fiscal policy. The price of Brent crude has tumbled by over 12% in the past fortnight, touching a four-month low below $75 a barrel, driven by concerns over global demand and a surprise output increase from OPEC+. For the Chancellor, this is a moment to seize.
The drop in petrol and heating oil prices will directly feed into lower consumer price inflation, which has been stubbornly above the Bank of England’s 2% target. Markets are already pricing in a faster path for rate cuts. The 10-year gilt yield has eased to 3.
8%, reflecting reduced inflation risk. This allows the Treasury to borrow more cheaply and, crucially, to shift its narrative from austerity to growth. The fiscal hawks in the City will be watching closely.
Any spending splurge must be targeted, not broad. The danger is that the government mistakes a cyclical oil price decline for a structural shift. If they commit to permanent tax cuts or spending increases based on temporary energy prices, they risk repeating the mistakes of the 1970s.
The bond market will punish that. But for now, the window is open. The UK’s fiscal rules, designed around debt falling as a share of GDP, have been a straitjacket.
Lower inflation and lower gilt yields make that target easier to hit. The Chancellor has room to invest in infrastructure, green energy, and perhaps even a pre-election tax cut. Capital flight from the UK has been a concern, with investors fretting over political instability and stagnant growth.
A credible growth plan tied to energy price relief could reverse that. The oil price slide also buys time for the Bank of England. They can hold rates steady or cut gradually, supporting the housing market and consumer confidence without stoking inflation.
The real test will be whether the government uses this opportunity to fix supply-side issues or simply spends the dividend. My bet is on a cautious expansion. The Treasury will likely announce a modest fiscal stimulus, front-loaded to boost growth before the next election, but with enough prudence to keep the bond market on side.
The US dollar’s strength adds another wrinkle. A strong dollar means oil priced in dollars is cheaper for UK buyers, amplifying the benefit. But if the dollar weakens on a Fed pivot, the oil price could rebound.
For now, enjoy the reprieve. This is a classic ‘Goldilocks’ moment for the UK economy: not too hot, not too cold. The Treasury must not burn the porridge.
