UK Economy Faces Double Blow as Oil Soars and Rate Cut Dreams Evaporate

The UK economy is facing a painful double blow from the Iran conflict: soaring oil prices that threaten to reignite inflation, and the collapse of expectations for an imminent interest rate cut. The probability of a Bank of England rate cut this month has plummeted from 80% to just 15% in the space of days, as the prospect of energy-driven inflation has made a reduction in borrowing costs politically and economically difficult to justify.
Oil prices surged past $90 a barrel during the week — their biggest weekly gain since the Covid-19 pandemic — as the conflict disrupted energy flows from the Gulf. UK bond yields recorded their biggest weekly jump since the Liz Truss mini-budget of September 2022, reflecting the market’s reassessment of the inflation and interest rate outlook. The FTSE 100 fell more than 5%, its worst week since the Trump tariff shock of April 2025.
UK consumers and businesses, still carrying the scars of the post-Covid inflation surge, face the prospect of another energy-driven cost increase. While Britain is not heavily dependent on Gulf energy — it relies on Qatar for only about 2% of its gas — it is not insulated from global energy market dynamics. UK gas prices surged to three-year highs this week, driven not by direct supply shortfalls but by fears of a global LNG shortage that could draw supplies away from Europe.
The airline sector has provided the most dramatic corporate illustration of the economic damage. IAG, British Airways’ parent, fell more than 12% on the week. Wizz Air lost nearly a fifth of its stock market value after warning the crisis could cost it €50 million in profits. For these companies, the combination of higher fuel costs and reduced passenger confidence about travel to the Middle East region is creating a perfect storm.
The broader economic outlook has darkened considerably. Economists who were cautiously forecasting declining inflation and falling interest rates are now revising their models to incorporate a sustained period of elevated energy prices. The most pessimistic scenarios — oil at $150, gas supplies severely constrained — would represent a shock comparable to the worst of the post-Covid inflation episode and could push the UK economy back toward recession.