U.K. borrowing costs surged again on Monday on rising energy prices, while the government is talking to international partners and its central bank to assess ways to limit economic damage from the escalating Iranian crisis, Prime Minister Keir Starmer said, warning a prolonged crisis could be painful.
British borrowing costs have soared since the conflict erupted more than a week ago – by more than those of other European countries and the U.S. – as investors fear that surging oil and gas prices will stoke already stubborn inflation.
Rate futures on Monday suggested investors were largely bracing for an interest rate increase by the Bank of England (BoE), reversing bets on a cut.
"The longer this goes on, the more likely the potential for an impact on our economy," Starmer said.
The jump in energy prices also risks forcing the government to intervene again to cushion the economic blow if the conflict rages on, a potential huge challenge to a government that has limited room to increase spending and is widely unpopular.
Starmer told an event in London on Monday that the government was trying to limit the fallout.
"What we're doing is monitoring the risk, working with others to mitigate the risk," he said.
"The chancellor is talking with the Bank of England every day to make sure that we're ahead of that, on energy prices for households."
Starmer also said the government was talking to international partners about how to reduce the economic impact from the conflict, which Britain wanted to de-escalate.
Britain's economy is particularly exposed to the price of gas.
When energy prices spiralled after Russia's 2022 full-scale invasion of Ukraine, the then Conservative government was forced to spend more than 40 billion pounds ($53 billion) to protect businesses and households from the impact.
Gas prices have more than doubled since the U.S. and Israel struck Iran, and Tehran hit its Gulf neighbors, limiting the production and transport of oil and gas in the region.
Starmer said Britain's system of capping energy tariffs would limit any sharp price rises for households until July.
A leading economist said rising energy bills, if maintained, would hit economic growth and could force Treasury chief Rachel Reeves to borrow more if the government also has to hike defense spending again.
"That's one of the reasons markets are concerned and why we're paying more for our borrowing," Paul Johnson, a former director of the Institute for Fiscal Studies, told Times Radio.
Starmer said on Monday that the economy was more resilient than during the last energy shock in 2022.
