Rachel Reeves has raised concerns that oil prices will rise as a result of a war between Israel and Iran.
The chancellor highlighted the fact that oil prices had risen by 10 per cent and also raised concerns that Iran could close the Strait of Hormuz, a major trading route.
Economists have warned that the conflict is likely to result in an increase in inflation, with higher prices at petrol pumps and in shops.
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It makes cuts to interest rates less likely and increases the likelihood that Reeves will have to raise taxes in her autumn budget given the strain on the public finances and her limited room for manoeuvre.
She told Trevor Phillips on Sky News: “We’ve already seen in the last few days, for example, oil and gas prices begin to go up … Oil prices have gone up by just over 10 per cent, they’re still down compared to a few months ago but of course we’re keeping an eye on that.
“And at the same time, as you say, trade routes are very important through the Middle East and we’ve seen disruption there in the past, partly because of the Houthi attacks for example. And so that is a cause for concern.”
The conflict has led to comparisons with Russia’s invasion of Ukraine, which led to a spike in energy prices. The Conservative government intervened with a multibillion-pound package to help households with their energy bills.
Reeves said that the government was “not anywhere near that stage at the moment” but would not “take anything off the table” in response to rising energy costs.
Lord Browne of Madingley, the former boss of BP, told the BBC that oil prices will “go up a long way” if Iran shuts the Strait of Hormuz. However, he suggested that it was unlikely to do so because it would be “cutting off its nose to spite its face”.
Pressed on how bad the economic fallout from the conflict could be, Reeves said: “It is very early days and things are moving quickly. But when we urge for de-escalation in the region that is in part because of the lives at risk … but also because what happens in the Middle East affects us here at home. It’s why in the spending review this week we invested heavily in our defence to keep our country safe.”
Lord Hammond, a former Tory chancellor, said that the government should have been building up its reserves. He told Sky News: “What she should have been doing, of course, a long time ago is building our reserve. But she hasn’t done that. If there’s an economic shock we will be in a much more difficult position in responding to it.
“It’s only if the situation becomes long-term sustained that I think there is a risk we could see serious economic disruption.”
Iranian politicians have called for the 30-mile-wide Strait of Hormuz, which links the Gulf to the Gulf of Oman and the Arabian Sea, to be shut.
The strait, which is jointly controlled by Iran and Oman, is a key route for the transport of fossil fuels. A fifth of all oil shipments pass through it along with a third of liquified natural gas.
