W. 12 Policy Watch

The UK 

The Iran conflict is increasingly influencing UK domestic policy, particularly in ways that directly affect businesses and prices. One of the most immediate areas is energy policy. As global oil and gas prices rise, the UK government may adjust the energy price cap or expand support schemes for households and firms. While this can protect consumers, it often shifts costs elsewhere, either through higher taxes or increased government borrowing, which can indirectly affect businesses.

Another key area is monetary policy. Rising inflation (driven largely by higher energy and import costs) puts pressure on the Bank of England to keep interest rates higher for longer. This has a direct impact on businesses, as borrowing becomes more expensive. Firms may delay investment, cut back on expansion, or pass costs onto consumers through higher prices.

The government may also respond through fiscal policy, such as targeted subsidies for energy-intensive industries like steel or chemicals. While this helps certain sectors, it can create uneven support across the economy and may distort competition. At the same time, there could be changes to tax policy or public spending to manage the wider economic impact.

For businesses linked to the EU these policies matter even more. Higher UK energy costs, combined with similar pressures in Europe, can disrupt supply chains and increase production costs. In addition, any policy aimed at improving energy security, such as investing in domestic renewables, may take time to have an effect.

Overall, UK domestic policies responding to the conflict are likely to raise costs in the short term, creating a more difficult environment for businesses and contributing to higher prices across the economy.

Europe 

From a European perspective, the conflict is similarly driving policy responses, particularly in relation to energy costs and economic stability. Rising oil and gas prices have already had a significant impact across the EU, where many countries remain heavily dependent on imported energy. While the physical supply of energy is currently stable, the increase in global prices is placing pressure on industries and households, with the EU’s total import bill for oil and gas rising noticeably in recent weeks.  

In response, the European Commission has outlined measures aimed at easing cost pressures, including increased financial support for industries and adjustments to the carbon market to stabilise energy prices. However, the EU has so far avoided more far-reaching interventions, such as direct price caps, reflecting differing views among member states. For example, Sweden has been among the countries cautious about weakening the EU’s carbon pricing system, highlighting internal divisions on how best to respond. 

More broadly, the situation has exposed Europe’s vulnerability to global energy markets. As highlighted by The Economist, sharp increases in energy prices risk slowing economic growth and reigniting inflation across Europe. Although only a limited share of imports comes directly from the Middle East, Europe’s dependence on global energy markets — particularly following the shift away from Russian gas — has increased its exposure to price volatility. The response at EU level has also been relatively limited, reflecting divisions between member states and constrained room for manoeuvre. 

For member companies, particularly those operating across the UK and EU, these developments may lead to increased energy and input costs, as well as continued pressure on supply chains and pricing. Companies in manufacturing, transport, and other energy-intensive sectors may be particularly affected, while broader inflationary pressures could influence demand, investment decisions, and financing conditions. 

Overall, while the EU is taking steps to manage the immediate impact, the conflict underscores ongoing structural challenges in Europe’s energy system and the importance of long-term strategies to reduce external dependencies and strengthen resilience.