Oil price rise puts more pressure on policymakers before the budget

By the Editorial Team · Friday, September 25, 2026

Brent crude oil prices climbed nearly 5% to $108 a barrel due to renewed conflict between Saudi Arabia and Houthi forces, complicating the UK government's efforts to manage energy costs ahead of Chancellor John Healey's upcoming budget. This price surge reduces fiscal flexibility and increases the likelihood of targeted consumer support measures, higher interest rates, and stricter fiscal policies to address inflation and borrowing costs.

Oil prices surged again on Thursday, intensifying challenges for UK policymakers as Chancellor John Healey prepares for the upcoming budget. The price of Brent crude rose nearly 5% to $108 a barrel amid renewed military clashes between Saudi Arabia and Houthi forces, a development that complicates efforts to stabilize energy costs and inflation ahead of the budget announcement next month.

Treasury officials have acknowledged that this sharp rise in oil and gas prices reduces the fiscal flexibility available compared to a month ago. With the Bank of England projecting a 24% increase in the energy price cap in January, government sources said work is underway to develop support measures to protect consumers from further price hikes. These measures are expected to be more targeted and less costly than the broad subsidies introduced by former Prime Minister Liz Truss in 2022. Among the options under consideration are shifting some green energy subsidies into general taxation, a strategy previously pursued by Rachel Reeves, or directing assistance specifically to low-income households, though there is skepticism within official circles about the efficacy of such targeting.

The ongoing conflict in the Middle East, particularly involving Iran, continues to affect global oil markets and fuel costs worldwide. Former US President Donald Trump has offered limited guidance on resolving the wider US-Israeli tensions with Iran, despite growing gasoline prices ahead of the upcoming US midterm elections.

Domestically, there is heightened concern about the potential for further interest rate hikes. Following the Bank of England’s recent decision to maintain rates at 3.75%, officials warned that persistent elevated energy prices could necessitate tighter monetary policy. Bank of England Chief Economist Clare Lombardelli emphasized that prolonged high energy costs risk triggering second-round inflation effects, including shifts in wage demands and price-setting behavior. Deputy Governor Sarah Breeden echoed this warning, noting that a sustained energy price shock increases the likelihood of policy tightening.

The expectation of higher inflation and interest rates amid ongoing energy volatility has contributed to a global sell-off in government bonds, raising the cost of borrowing for the UK and other countries. The yield on 10-year UK government bonds climbed to 5.39%, nearing a 19-year peak reached earlier in the week, while US 10-year Treasury yields hit 5.17%, the highest since 2007. Rising yields increase the cost of government borrowing and complicate fiscal planning, feeding into forecasts by the Office for Budget Responsibility that factor into whether the Treasury is on track to comply with Labour’s fiscal rules.

Analysts suggest that market-driven yield increases have eroded roughly half of the £24 billion fiscal “headroom” accumulated under former Chancellor Rachel Reeves since the spring statement in March. Healey has pledged to adhere to these fiscal rules while maintaining a buffer for uncertainty, but officials expect this margin to be considerably smaller than before. Rebuilding fiscal space would likely require significant tax increases or spending cuts, though Treasury sources insisted that next month’s budget will focus narrowly on immediate priorities given the challenging economic environment.

As geopolitical tensions persist and energy prices remain elevated, UK policymakers face growing pressure to balance consumer support, inflation control, and fiscal discipline in the forthcoming budget.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.