Fears over delays to interest rate cuts or possible rate rises over the next few months as oil price per barrel tops $100 for first time since Russia’s invasion of Ukraine
Today’s spike in oil prices could lead to interest rate rises and force the government to raise taxes again at the next Budget, the Construction Products Association has warned
CPA economic director Noble Francis said a sharp rise in energy prices and CPI inflation will lead to slower growth this year and a delay in interest rate cuts “at the very least”.
The benchmark oil price topped USD $100 a barrel this morning for the first time since 2022 at the start of Russia’s invasion of Ukraine.
It follows the launch of attacks against Iran by the US and Israel, which have led to a near complete stop in traffic through the Strait of Hormuz at the entrance to the Persian Gulf through which around 20% of the world’s oil travels.
The market reaction appears to have escalated over the weekend after strikes on several major oil infrastructure sites in Iran and other countries surrounding the Gulf.
US president Donald Trump has said a “short term” rise in oil prices was a “very small price to pay” for world peace.
But while the CPA said the impact on material costs would depend on the duration of the conflict, Francis said the combination of higher energy prices and lower growth forecasts published prior to the start of the conflict will put pressure on the Treasury.
Chancellor Rachel Reeves has already raised taxes in two consecutive Budgets, a £40bn hike in 2024 and a further £26.1bn last year.
However, Francis said the Office for Budget Responsibility’s decision last week to revise GDP growth for 2026 down 1.4% To 1.1% has increased the likelihood that the government will need to raise taxes for a third time.
He added that lower growth will likely be compounded by higher unemployment figures, which are expected to continue rising due to the impact of the increase in the National Living Wage and business rate rises announced in Reeves’ first two Budgets.
“That already increased the likelihood that the government would have to raise taxes again,” Francis said.
“But the sharp rise in energy prices and CPI inflation will lead to slower growth and at the very least delayed interest rate cuts or potentially interest rate rises.
“So, the government will have to increase taxes again, although it’s not something that people are talking about yet, as the focus is currently just on the immediate effect.”
The rise in oil prices is likely to increase material prices due to increased energy and transport costs, including for imported products. Around a quarter of the UK’s construction products are imported with the largest share coming from China, which is reliant on Iranian oil.
The Iran conflict has also led to a rise in UK government borrowing costs, with the interest rate on two-year government bonds rising from 3.87% to 4.12% today.
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