Prime Minister Keir Starmer summoned a national emergency meeting on Monday to deal with the economic fallout from the escalating war in Iran, as Britain’s government borrowing costs surged to their highest level since the global crisis of 2008.
The storm in financial markets intensified in early trade this week after Iran said it would strike the energy and water systems of Gulf neighbours if U.S. President Donald Trump follows through with a threat to hit Iran’s electricity grid.
Britain’s heavy dependence on imported natural gas, persistently high inflation and stretched public finances have pushed its government bonds into a far steeper decline than those of international peers.
The so-called “Cobra” meeting – named for a secure cabinet briefing room used for national emergencies – was set to take place in the afternoon, London time. The governor of the Bank of England Andrew Bailey is due to attend, as well as Starmer’s finance minister, foreign secretary and energy secretary.
“I am asking for every lever that’s available to the government to deal with the cost of living to be discussed at Cobra,” Starmer told reporters.
The finance ministry said energy security and the resilience of industry and supply chains would also be discussed.
Finance minister Rachel Reeves has said it is too soon to say what the impact of the war will be for Britain’s economy. She has resisted calls for sweeping cost-of-living measures for households, saying instead that more targeted support is under consideration.
Housing minister Matthew Pennycook told the BBC that options included tackling “profiteering that we’re potentially seeing from fuel retailers”. The industry denies it is happening.
INFLATION SET TO SHOOT HIGHER
The energy price shock threatens to push Britain’s inflation rate back up – possibly to 5% later this year, according to some economists – and deal another setback to the slow-growth economy.
It could also knock Reeves off course from her efforts to repair the public finances.
Last week, the government launched a 53 million-pound package for homes that use heating oil to generate warmth. But the pressure for wider measures has added to the unease of bond market investors.
On Monday, British 10-year government borrowing costs surged further past the 5% mark, last seen during the global financial crisis almost 20 years ago.
Until last week the majority of losses had been confined to short-dated gilts, which largely track interest rate expectations.
Bets on the next move by the BoE have shifted violently towards interest rate hikes and away from the cuts that were expected until the eve of the war. On Monday, the market priced in nearly four quarter-point rate hikes.
Last week, the central bank said it was ready to act to keep inflation on track for its 2% target. Some policymakers said an increase in borrowing costs might be needed but Bailey said it was too soon to say that rates would have to go up.
“On top of higher inflation, calls for the government to provide financial support for the economy in the face of higher energy prices is unsettling for the gilts market,” said Jane Foley, senior FX strategist at Rabobank.
“A rout in gilts, if driven by speculative or overseas investors, has particular capacity to weigh on the pound.”
(Reporting by Andy Bruce）
