Global Perspectives

The renewed instability in the Middle East has pushed oil prices sharply higher and unsettled energy markets once again. For the UK, the consequences are familiar: rising fuel costs, pressure on household budgets, and renewed strain on an already fragile growth outlook.¹ This is an external shock. It is not of our making, and it is largely beyond our control. The question is how we respond.

The Bank of England has held rates at 3.75%, acknowledging that higher energy prices will push inflation up in the near term. It is also right to recognise the limits of monetary policy. Interest rates do not produce oil, nor do they stabilise global supply chains. Their role is to prevent temporary shocks becoming embedded in domestic inflation.²

That distinction matters. Raising rates into a supply-driven shock may demonstrate resolve, but it risks weakening demand without addressing the cause. At a time when growth is already subdued, that is not a trivial trade-off.

The UK enters this period with little room for error. The Office for Budget Responsibility expects real GDP growth of just 1.1% in 2026.³   Public finances are already under strain from elevated debt-servicing costs, and gilt yields have remained towards the top end of the G7 range.⁴ Further rate increases would add to that burden, constraining both private investment and the state’s capacity to act.

There is an alternative. It is less immediate than a rate change, but ultimately more effective.

The first part is to strengthen national saving. The UK has already taken a step through auto-enrolment, bringing millions into pension saving. Building gradually on that foundation would absorb some demand pressure without the blunt impact of higher interest rates. It would also improve household balance sheets and increase long-term financial strength.

Other countries offer useful lessons. Australia’s superannuation system has created a large and stable pool of domestic capital, with assets of more than A$4.3 trillion, equivalent to around 160% of GDP. ⁵ Evidence suggests compulsory saving raises total household saving, even if part of the effect is offset elsewhere. ⁶ Singapore’s Central Provident Fund likewise demonstrates how sustained contributions can build significant long-term assets for individuals over time.⁷

A deeper domestic savings base has wider benefits. Long-term institutional investors can provide a more stable source of demand for government debt, lessening reliance on more volatile external capital. The IMF has noted that pension funds are often dominant investors in domestic government bond markets and have traditionally contributed to financial soundness because of their long-term liabilities.⁸

The second part is to invest more consistently in the foundations of the economy. The UK has seriously underinvested in energy, infrastructure, and productivity-enhancing capacity for many years. The result is an economy that is both more exposed to external shocks and less able to grow its way through them. The OBR has repeatedly identified weak productivity growth as a central constraint on the UK’s medium-term economic and fiscal outlook.⁹

Improving energy resilience is particularly important. Reducing dependence on imported energy does not eliminate global shocks, but it does limit their transmission into the domestic economy. More broadly, sustained investment in infrastructure and productive capacity raises the economy’s potential growth rate, supporting fiscal viability over time.¹⁰

Taken together, these measures change the balance of policy. Monetary policy continues to concentrate on keeping inflation expectations anchored, but it is no longer acting alone. Stronger saving moderates demand without suppressing investment. Better investment increases supply and resilience. The result is a better-balanced and more durable response.

This is not an argument for complacency on inflation. It is an argument for using the right tools. A supply shock needs precision. Counting solely on interest rates risks treating the symptoms while weakening the patient.

We cannot control the oil price, but we can control our response to it.

Reaching for higher interest rates may feel decisive, but it does little to address the source of the problem and risks compounding the damage. A more innovative approach, raising national saving, investing with purpose and maintaining monetary discipline, offers something more valuable: resilience.

That is how you navigate an oil shock. And it is how you build an economy capable not just of absorbing the next one, but of emerging stronger from it.