War threat to rate cuts: Iran fallout threatens to strangle any green shoots of recovery, says ALEX BRUMMER

The financial fall-out from Donald Trump’s war on Iran is rapidly changing the global outlook. It has rendered Rachel Reeves’ Spring Statement irrelevant.

Ahead of the assault, there were signs of green shoots, as evidenced by the upbeat tone from Britain’s services sector, with purchasing managers reporting ten months in positive territory accompanied by rising business and consumer confidence.

But it will be hard to sustain any of that with conflagration in the Gulf. Look at South Korea – one imagines its supercharged economy, with its vibrant electronics and creative industries, might be immune to strains.

But worries about energy shortages and an interest rate increase sent shares on its KOSPI index down 12 per cent yesterday, the biggest one-day fall in 46 years, and the Korean Won currency skidded lower.

Reeves used her Commons peroration to highlight savings to households from falling mortgage costs. But for how long?

The surge in energy prices, insurance and shipping costs will undermine efforts by the Bank of England and other central banks to tame inflation. 

So far, the price reaction has been nowhere near as severe as four years ago when Russia attacked Ukraine and gas pipelines to the West gummed up.

The US and British policy response then was to assume the rise in inflation was transitory and that interest rates safely could remain low.

Easy money is the classical formula for averting slump and may have prevented a prolonged recession. It also led to a cost-of-living crisis with voters in the UK and the US now fixated on affordability.

This will be the ultimate dilemma for the Bank of England’s interest rate fixers when they convene on March 19. At the last meeting it was assumed more cuts from the current 3.75 per cent were certain. 

Now there is little certainty. Divided rate-setters will not want to give their blessing to an inflation spike, and may well desist.

One major forecaster, the NIESR, is even predicting 4 per cent. In the eurozone, where key rates hover around 2 per cent, sentiment has changed, with a hike seen as a possibility. 

Unless there is a sudden end to hostilities, the Old Lady will not ease policy – so no cheaper mortgages any time soon.

Venture capital hit

The Chancellor’s do-nothing moment was made possible because so many tax rises, notably the freeze on income tax thresholds, are baked in the cake and yielding an estimated £67billion of extra revenues a year for the Exchequer by 2030-31.

That, inevitably, will stifle enterprise and aspiration. So much for the growth agenda! 

Buried among Reeves’ autumn tax rises was a decision to reduce the income tax benefit on investing in venture capital trusts from 30 per cent to 20 per cent.

The trusts offer UK investors opportunity to back Britain’s new wave of innovative companies in artificial intelligence and biomedical research.

They allow asset managers, such as listed Foresight Group, to harvest

investments not just in London and the South East, but also across the regions and nations.

The last time that the tax relief was downgraded – from 40 per cent to 30 per cent by Gordon Brown in 2006 – it led to a dramatic fall of investment in the trusts, and it took two decades for volumes to catch up.

The Treasury’s hatred of tax reliefs is in its DNA. If the Chancellor is serious about refuelling the growth agenda in her ‘Mansion House’ speech this summer, she could rescind the measure.

Every little change would help.

Military plunderers

War in the Middle East underlines the value of a robust defence sector and resilient British suppliers.

It would be precisely the wrong moment to allow private equity ghouls Tinicum and Blackstone, following an earlier reported approach by Advent, to gobble up UK aerospace parts maker Senior.

Flight refuelling innovator Cobham, satellite champion Inmarsat, and submarine sonar pathfinders Ultra Electronics have already fallen into the hands of predators, with a loss of command and control.

Peter Kyle, the Business Secretary, needs to bare his teeth, invoke the National Security and Investment Act and end this plunder.