UK's Starmer Calls Emergency Meeting on Economy as Iran War Risks Mount

UK Government Holds Emergency Meeting as Iran War Threatens Economic Stability

Economic Impact of Iran War on the UK

Government Response and Emergency Meeting

MANCHESTER, England, March 22 (Reuters) - British Prime Minister Keir Starmer is set to chair an emergency meeting on the economic fallout from the war in Iran on Monday, with finance minister Rachel Reeves and Bank of England Governor Andrew Bailey in attendance, the government said.

Investors are bracing for another stormy week in financial markets after Iran said it would strike the energy and water systems of Gulf neighbours if U.S. President Donald Trump follows through with a threat to hit Iran's electricity grid.

Britain is watching with particular unease. The country's heavy dependence on imported natural gas, persistently high inflation and stretched public finances have pushed its government bonds into a far steeper decline than those of international peers.

Key Topics for the COBRA Meeting

"Topics expected to be covered are the economic impact of the crisis on families and businesses, energy security and the resilience of industry and supply chains alongside the international response," Britain's finance ministry said ahead of Monday's so-called "COBRA" meeting.

Foreign Secretary Yvette Cooper and Energy Secretary Ed Miliband will attend as well as Starmer, Reeves and Bailey.

Government Stance on Economic Support

Reeves has said it is too soon to say what the impact of the war will be for Britain's economy and has resisted calls for sweeping cost-of-living measures for households, saying instead that more targeted support is under consideration.

Inflation and Market Reactions

Inflation Set to Shoot Higher

INFLATION SET TO SHOOT HIGHER

The energy price shock threatens to push Britain's inflation rate back up - possibly to 5% later this year, according to some economists - and deal another setback to the slow-growth economy.

Risks to Public Finances

It could also knock Reeves off course from her efforts to repair the public finances if the oil and gas price surge is sustained and major support measures are required, possibly leading to more tax increases later this year.

Last week, the government launched a 53 million-pound package for homes that use heating oil to generate warmth.

But the pressure for wider measures has added to the unease of bond market investors.

Bond Market Volatility

On Friday, British 10-year government borrowing costs surged past 5% for the first time since the global financial crisis almost 20 years ago.

Until last week the majority of losses had been confined to short-dated gilts, which largely track interest rate expectations. Bets on the next move by the BoE have shifted violently towards interest rate hikes and away from the cuts that were expected until the eve of the war.

Last week, the central bank said it was ready to act to keep inflation on track for its 2% target. Some policymakers said an increase in borrowing costs might be needed but Bailey said it was too soon to say that rates would have to go up.

The selloff of longer-dated bonds as well as short-term debt suggests investors are starting to price in Britain's fiscal vulnerability to the energy price shock.

Expert Commentary on Market Stress

"Developments over the weekend mean we are entering a new and very dangerous phase for financial markets," said Neil Wilson, UK investor strategist at Saxo Markets in London.

"The move in bond yields last week was material and has added already to stress in financial markets. Markets are pricing for a central bank response."

(Reporting by Andy Bruce. Editing by Jane Merriman)