The International Monetary Fund (IMF) has warned that Britain’s economy is especially exposed to an energy shock similar to that experienced in 2022 as turmoil in the Middle East deepens.
As oil prices surged again, the IMF said in a blog post that in Europe the impact of the Iran war was ‘reviving the spectre of the 2021-22 gas crisis’.
That was when the build up to and mobilisation of Russia’s full-scale invasion of Ukraine drove a previous surge in gas and oil prices, pushing UK inflation into double digits.
The IMF said: ‘The war in the Middle East is upending lives and livelihoods in the region and beyond.
‘It is also dimming the outlook for many economies that only just shown signs of a sustained recovery from previous crises.’
And it added that ‘countries such as Italy and the United Kingdom are especially exposed by their reliance on gas-fired power’.
The surge in borrowing costs creates a headache for Rachel Reeves
The warning came as UK borrowing costs were on course for their biggest monthly increase since Liz Truss’s disastrous mini-Budget sparked a major sell-off, also in 2022.
Yields on UK ten-year bonds, which rise as prices fall, have climbed by 16pc so far this month as the US-Israel war on Iran causes market mayhem.
Bonds – small parcels of debt issued by governments or companies to raise cash – have been caught up in the sell off.
Investors fear that the surge in oil and gas prices due to the war will drive up inflation, forcing central banks to raise interest rates rather than cutting them.
Britain – which already has the highest borrowing costs in the G7 group of advanced economies – has been worse hit than some others.
It already has the highest inflation in the G7 and investors also fear it could embark on a borrowing splurge to protect households from surging energy bills.
On Monday, there was little sign of respite as oil prices surged again, with Brent crude climbing to nearly $117 a barrel.
However, UK borrowing costs did edge lower, to around 4.9pc, having topped 5.1pc last week as they hit the highest level since 2008.
The increase in bond yields poses a major headache for Chancellor Rachel Reeves, knocking billions off her £23.6bn ‘headroom’ against meeting tax-and-spend rules.
Howard Davies, former chairman of NatWest, told the BBC: ‘The overall position of the UK – the financial markets are telling us – is not good.
‘Confidence in our borrowing has gone down and the costs of our borrowing have gone up, because people are concerned about our public finances.
‘The increase in interest rates that has happened for us means about £12bn a year of additional interest payments.’
That is ‘eating up a lot’ of the headroom, Davies said, and ‘any suggestion that the government’s prepared to take the brakes off and splurge on public spending may result in even further increase in interest rates… so you’ve got to be very careful here’.
Elsewhere, US bond yields are up this month by a chunky 10pc, and Germany’s by 15pc. Japanese ten-year bonds are up by 11pc and Canada’s have risen 12pc.
The sell-offs have been even more pronounced in France, where yields are up 17pc, and in Italy, where they have surged by 22pc.
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UK ‘especially exposed’ to 2022 style gas shock, IMF warns – as gilts head for worst month since Truss