Germany will cut taxes on diesel and petrol for two months, chancellor says
Germany is rolling out support for consumers and businesses facing higher motor fuel costs.
Chancellor Friedrich Merz has announced that petrol and diesel taxes will be cut for two months to provide relief to households and businesses hit by the energy shock during the Middle East war.
Merz told a press conference:
“We will reduce... the fuel tax on diesel and gasoline by approximately 17 (euro) cents per litre for two months.”
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Rachel Reeves said she would set out a support package this week to help businesses struggling with soaring energy costs as a result of the Iran war.
Like other countries, the UK is exposed to the economic fallout from the Iran war, which has driven oil and gas prices sharply higher on world markets, thereby increasing energy bills and fuel prices for households and businesses.
Crude oil prices spiked to nearly $120 a barrel during the war, but fell below $100 a barrel last week after the US and Iran agreed a temporary ceasefire. However, they are expected to rise again on Monday after the two countries failed to reach a deal to end the war over the weekend.
Writing in the Sunday Times, the UK chancellor said:
“The war in Iran will come at a cost to British families and business… We don’t yet know the full scale of those costs, but the immediate priority must be to ensure that the ceasefire holds.”
She added:
“That is the best protection we have against higher costs at home and at the IMF meetings in Washington this week I will be working with allies on the action we can take to guarantee freedom of navigation, including the Strait of Hormuz, to keep energy supplies moving again.”.
She and other finance ministers along with central bankers are heading to Washington for the International Monetary Fund and World Bank’s spring meetings starting on Monday.
Higher energy prices will increase the pressure on central banks to tighten monetary policy, to prevent a surge in inflation.
This morning, City investors are pricing a roughly 84% chance that the Bank of England raises interest rates twice this year, Reuters reports, up from a 60% chance on Friday.
Airline stocks hit by conflict worries and higher oil
Shares in European airlines are dropping in early trading, amid disappointment that the talks between Washington and Tehran broke up without a breakthrough last weekend.
British Airways’ parent company, IAG, are down over 2% this morning, with budget rivals Wizz Air (-6.5%) and easyJet (-3.8%) falling more sharply.
In Germany, Lufthansa has dropped by 4%.
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FTSE 100 drops
London’s stock market has opened with a bump, as traders react to the lack of progress in the US-Iran peace talks.
The FTSE 100 index of blue-chip shares has lost 0.6% at the start of trading, falling by 67 points to 10,533 points.
AB Foods (the grocery, sugar, agriculture, ingredients and retail group) are the top faller, down 2.7%, with airlines, miners, banks and housebuilders all lower.
Energy companies are rallying, though; BP and Shell are both up more than 1%.
Energy shock to wipe out growth in UK living standards
The surge in energy costs from the Iran war will cost a typical UK household almost £500, new research from the Resolution Foundation shows.
The Resolution Foundation have esimated that rising energy prices are likely to tip living standards growth into negative territory this year.
That’s because the increased cost of energy bills and petrol at the pump will almost certainly be passed onto households.
The typical household is now set to see its income fall by 0.6% – a difference of £480 – over the course of the current financial year, they say, Before the conflict, they were on track for 0.9% growth.
Average income growth for the poorest fifth this year is now set to be just 1.2%, down from 2.8% before the conflict.
James Smith, chief economist at the Resolution Foundation, says:
“Despite hopes for a sustained peace, the path of this conflict remains uncertain and energy prices remain well above pre-war levels, meaning many households face a decline in their purchasing power this year.
“This squeeze will run right through the income distribution. Lower-income households will still see some income growth thanks to a long-awaited rise in real benefit levels, but inflation will likely knock more than a percentage point off what they stood to gain. For those in the middle and towards the top of the income distribution, even the thin growth they had been expecting has tipped into negative territory.
“Deescalation is certainly welcome, but damage to household finances this year is to a large degree already done. The Government should act now to prepare a social tariff that reaches households falling through the cracks this winter.”
Heathrow Airport has warned that the outlook for the next few months is uncertain, due to the ongoing conflict in the Middle East.
In its latest traffic commentary, Heathrow says it is supporting airlines and passengers as they adapt to airspace closures, adding:
The knock-on impacts to global supply chains, including fuel, have not affected airport operations. Heathrow will monitor the situation and liaise with Government and airlines to protect passengers’ journeys.
The US dollar is rallying as a sharp risk-off move ripples across markets.
The dollar index, which tracks the greenback against a basket of other currencies, has gained 0.35% this morning.
The pound is down half a cent, to just above $1.34.
UK gas price jumps
The price of wholesale gas has also risen this morning.
The month-ahead US gas contract is up 9% to 119.50 a therm, its highest level since last Tuesday (before Donald Trump announced the two-week ceasefire with Iran).
Before the conflict began at the end of February, gas was trading below 80p a therm, before hitting 180p/therm in mid-March.
Analyst: oil remains vulnerable to geopolitical triggers.
Every barrel of risk added to oil markets carries an inflation price tag for the global economy, warns Priyanka Sachdeva, analyst at brokerage Phillip Nova:
Oil markets have decisively re-entered geopolitical mode, with prices vaulting back above the psychological $100 per barrel threshold as the United States moved to impose a naval blockade targeting Iranian shipping through the strait of Hormuz.
Both benchmarks, WTI and Brent, opened gap-up and currently hover with almost 8% gains. The market reaction underscores a simple but powerful reality: Hormuz risk is not theoretical; it is structural, and it is real.The latest catalyst came after talks mediated by Pakistan failed to produce a durable agreement, prompting the U.S. to announce enforcement of maritime restrictions on vessels moving to and from Iranian ports. The mere threat of enforcement alone has been sufficient to re-price risk, demonstrating how vulnerable oil remains to geopolitical triggers.
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Only mild losses in Asia-Pacific markets after peace talks break down
The breakdown of US-Iran peace talks last weekend has only led to modest losses in Asia-Pacific markets.
Japan’s Nikkei index is down 0.75%, while Hong Kong’s Hang Seng index and the South Korean KOSPI have both dropped by 1.15%.
Michael Brown, senior research strategist at brokerage Pepperstone, says:
While crude has advanced, and stocks slipped a touch, the overall market reaction to the weekend news of a US Navy blockade of the strait of Hormuz has been relatively contained, as participants view the move largely as a negotiating gambit from President Trump.
While it’s clearly a risk-averse start to the trading week, amid President Trump’s announcement of a Navy blockade in the strait of Hormuz, the general market reaction can be summed up as ‘could be worse’.
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The US blockade of the strait of Hormuz is a blow to the 20,000 seafarers who have been trapped in the Gulf for the last six weeks.
One told us last week:
“I gave my notice exactly one month ago. I’ve informed the master, I’m not willing to sail through the strait. It’s about safety, it’s all about safety.”
Introduction: US blockage threat puts oil back over $100
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We start a new week, again, with an escalating conflict in the Middle East, after the collapse of US-Iran peace talks last weekend.
Donald Trump’s threat to impose a blockade on the strait of Hormuz has driven the oil price back over $100 a barrel again this morning, as hopes of an end to the conflict soon take another knock.
Brent crude, the international benchmark, has jumped by 7% to $101.88 a barrel, while US crude is up over 8% to $104.69 a barrel – back towards the highs of almost $120 set early in the conflict.
The US president also said he had asked the US Navy to “interdict” any ship that had paid a toll to Iran for passage through the strait, in an attempt to choke off the flow of Iranian oil.
Tony Sycamore, market analyst at IG, says:
By doing so, the US aims to force Tehran’s allies and customers to put pressure on Iran to reopen the vital chokepoint, potentially resolving the impasse without committing ground forces to another protracted conflict.
This approach will undoubtedly strain Iran’s relationship with its largest customer, China. Having already lost Venezuelan supply earlier this year, Beijing now faces the potential loss of another roughly 2m barrels a day.
The war has already driven confidence across Britain’s biggest companies down to a six-year low.
Deloitte’s quarterly survey of chief financial officers has found that concerns around energy prices, inflation and interest rates surging after the Middle East conflict, to its lowest level since early in the Covid-19 pandemic in 2020.
The agenda
2pm BST: Opec’s monthly oil market report
3pm BST: US home sales for March
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