Reeves warns impact of Iran war on economy will persist once hostilities end

The impact of the Iran war on inflation and economic growth will linger even if an end to the conflict is found, Rachel Reeves and fellow finance ministers have warned.

In a joint statement with international counterparts, the Chancellor cautioned against knee-jerk responses to the cost-of-living crisis triggered by the war.

“We are committed to managing the economic response to and recovery from this crisis in a co-ordinated, responsible and responsive way,” Ms Reeves and counterparts from Ireland, Australia, Japan, Sweden, the Netherlands, Finland, Spain, Norway, Poland and New Zealand said.

They said the US-Israeli strikes and Iran’s subsequent retaliation had caused “unacceptable loss of life and significant disruption to the global economy and financial markets” and welcomed the ceasefire.

The statement said: “We call for a swift and lasting negotiated resolution to the conflict, and a return to free and safe transit through the Strait of Hormuz, that mitigates impacts on growth, energy prices and living standards, in particular for the poorest and most vulnerable.”

But they said any further escalation of the conflict would pose “serious additional risks to global energy security, supply chains, and economic and financial stability”.

“Even with a durable resolution of the conflict, impacts on growth, inflation and markets will persist,” they said.

Ms Reeves is set to meet US treasury secretary Scott Bessent after he said “a small bit of economic pain” caused by the Iran war was worth it to prevent Tehran getting a nuclear weapon.

The comments put him at odds with the Chancellor, who has gone public with her anger and frustration at the “folly” of America’s actions in the Middle East and its financial fallout on families.

Ms Reeves said: “This is not our war, but it is pushing up costs for UK families and businesses.

“My priority is economic security – keeping costs down, taking back control of our energy security, and acting responsibly in the national interest.

“A sustained ceasefire and avoiding knee-jerk responses is key to limiting costs for households.

“In Washington, I’m urging a co-ordinated response focused on stability, including safe passage for energy supplies through the Strait of Hormuz.”

Household energy bills are forecast to increase later this year because of the conflict pushing up global oil and gas prices, while motorists are already feeling the impact of higher costs at the pump.

Ms Reeves has signalled that any energy bill help later this year will be targeted at the poorest households, rather than a universal bailout of the type offered by Liz Truss when she was prime minister in the wake of the Russian invasion of Ukraine.

For motorists, fuel duty remains frozen but Ms Reeves is under pressure to scrap a series of increases set to begin in September.

Ms Reeves is in Washington for the International Monetary Fund (IMF) spring meetings which have been dominated by the economic fallout from the Middle East crisis.

The IMF slashed its forecast for UK gross domestic product (GDP) to 0.8% in 2026, down from the 1.3% expected in January, the largest downgrade of any of the G7 advanced economies.

Meanwhile, US President Donald Trump has said a second round of talks between America and Iran could happen “over the next two days”, after negotiations at the weekend collapsed.

Mr Trump told the Fox Business Network he viewed the conflict as nearing completion and said Iran was keen to make a deal.

“If I pulled up stakes right now, it would take them 20 years to rebuild that country,” he said.

“And we’re not finished. We’ll see what happens. I think they want to make a deal very badly.”

Tehran’s nuclear ambitions were a key sticking point.

Diplomats have been working behind the scenes as the US imposed its blockade of Iranian ports and Tehran threatened retaliatory strikes across the region, amid a shaky ceasefire.

At the same time, Prime Minister Sir Keir Starmer is seeking to co-ordinate international efforts to ensure the strategic Strait of Hormuz can remain open to shipping after hostilities end.

The critical waterway, used to move one-fifth of the world’s oil and gas supplies, has become a major flashpoint in the conflict, with its effective closure by Iran hiking the cost of fuel, food and other basic goods.

But responding to the spike in prices, Mr Bessent said “a small bit of economic pain for a few weeks is worth taking off the incalculable tail risk of either a nuclear Iran or a nuclear Iran that uses that weapon”.

He said “there is nothing more transient than what we are seeing now”, and added: “So the conflict will end, prices will come down, and then headline inflation will come down, and with that, gasoline prices will come down.”