Exclusive: Rachel Reeves on Iran Shock, US Trade and Inflation Risks

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1:37Stephanie Flanders:Bloomberg Audio Studios.

1:40Rachel Reeves:Podcasts, radio, news.

1:43Stephanie Flanders:Hello, Trumponomics listeners. We're working hard on an episode with opinion columnist and energy guru Javier Blas and Bloomberg Economics' Ziad Daoud assessing the economic impact of the war in Iran. And that's going to be out in feeds at the regular time tomorrow, Wednesday. But earlier today, I sat down for an exclusive conversation with the UK's Chancellor of the Exchequer, Rachel Reeves. We had an opportunity to discuss her expectations for the UK's economy over the coming years, how she sees the escalating war in the Middle East affecting it. We also mentioned her take on the Supreme Court ruling on Trump tariffs, the status of the UK-US trade deal, and I asked her whether she thought people moving to Dubai to avoid UK taxes might now be starting to rethink.

2:32Stephanie Flanders:Here's that conversation.

2:43Stephanie Flanders:Chancellor, thank you so much for doing this. You've come over to Bloomberg headquarters straight from the Treasury on a busy day. I came straight from the Chamber. From the Chamber, of course. Yes. You wanted to talk about your thoughts about the state of the UK economy and the growth plan going forward. But obviously, given everything that's happening today in markets in the Middle East. I want to start with just asking you a few questions about that. I mean, you mentioned in your speech in the Commons that you were planning to talk tomorrow to North Sea oil producers. What are you hoping to get out of that conversation?

3:18Rachel Reeves:So I said in the chamber that some of the most affected industries I wanted to spend some time with and been in touch with over the last few days. And obviously, developments in oil and gas markets are absolutely crucial for every family and every business in Britain. Now, oil and gas production in the North Sea counts for less than 1 % of global supply of oil and gas, but it's still very important. It's important for jobs in the UK, it's important for investment, and it's important for every family in Britain. So I'm going to be meeting with them tomorrow to talk about their production plans and also to talk about how they see the situation evolving, because every oil and gas company pretty much that operates in the North Sea will also operate in other parts of the world, whether that is Shell or BP or Equinor or others.

4:11Rachel Reeves:And so getting their insights into how oil and gas prices might evolve based on a number of different scenarios over the coming days and weeks will be very useful for me and for the government.

4:27Stephanie Flanders:We can give you our scenarios as well, but our economists are looking at this. As you suggest, there's nothing that our North Sea oil producers could do to affect a global oil price hike. It is already up significantly. If it's sustained for any period, it seems like it would be much harder to get the headline inflation rate in the UK back to 2%. as you were hoping it would be. You did a lot of things in the budget to encourage, should we say, inflation to go back to 2 % even by April. Has Donald Trump's war in Iran taken that away from you?

4:59Rachel Reeves:Well, the first thing I would say is that the action that I took in the budget will still happen. So the freeze in prescription charges, the freeze in rail fares, and also the£150 off of energy bills that I announced in the budget will take effect next month. And so people paying, families paying their gas and electricity bills do not need to worry about the next three months. That price cap is set and they will get the benefit of those policies I announced in the budget. But of course, you know, we have to see how things evolve in terms of where oil and gas prices go going forward. But what the Office of budget responsibility confirmed today and what the Bank of England said when they published their most recent outlook for inflation in February was that the measures that we have taken as the government are helping bring inflation back down to target much sooner than they anticipated.

5:57Rachel Reeves:I think in the OBR numbers today, inflation is likely to meet target six months earlier than they previously envisaged. Now, of course, that doesn't take into account developments over the last few days, but also we are only just into what is happening in the Middle East. We saw each other last week, Stephanie, and we were not talking about the Middle East or Iran. There was lots of other things to talk about in the economy, but this only really kicked off on Friday. So, of course, we monitor developments very, very closely and do everything in our power to protect businesses and families in the UK.

6:37Rachel Reeves:And we are better placed to do that than we were just a few months and years ago because of the choices we've taken as a government. So what I was able to set out today in the OBR forecast is that both interest rates and inflation have been falling faster than expected. Government borrowing and debt have been revised down since the budget last year. G7 borrowing is not coming down at the same rate that it is in the UK. Our public sector net borrowing is forecast to be just 4.3 % this year. It's the lowest in six years and the first time in 22 years that our borrowing has been lower than the G7 average.

7:20Rachel Reeves:So welcome developments, which put us in a stronger position to be able to withstand the shocks, including the shock that we are likely to be responding to in the weeks and months ahead than we would have been without the action that we've taken as a government to secure and stabilise the public finances.

7:36Stephanie Flanders:But it is vulnerable. I mean, even that fall in borrowing is driven in large part, actually, by lower than expected spending, which is actually in turn, lower spending on gilt interest, which is a result of lower inflation. So that lower path for inflation that we were counting on, even markets were assuming for this year, that was also going to potentially pave the way for another rate cut. You mentioned in your speech how proud you were that you've been part of the government. The Bank of England had been able to have six rate cuts since labour came to power.

8:08Rachel Reeves:There's three things that are going on to put our public finances in a better position. First of all, tax revenues have come in stronger than anticipated. And we saw that particularly in the January borrowing numbers. It was the biggest surplus on record.

8:23Stephanie Flanders:But year to date, isn't it still lower than the forecast, than the OBR forecast? So that month was very good.

8:30Rachel Reeves:Borrowing has come in lower this year than the borrowing has come in lower than forecast. And spending, we set out the spending review last summer. Many people said, well, we wouldn't be able to live within those budgets. Well, this year, we have not used all of the surplus that is put aside for genuine emergencies. and instead were able to roll that surplus forward. So spending is under control, whereas, of course, when I became Chancellor, the reserve for the year that we were in, and we were only three months into it, had been spent four times over. So we haven't used a full reserve for this year.

9:06Rachel Reeves:And also borrowing costs have come down. The OBR today forecast that borrowing costs next year will be£4 billion lower than even they thought in the budget last year. So tax revenue coming in a bit stronger, spending coming in as planned and in fact not even using the full reserve and also borrowing costs coming down because of that additional stability we've brought to the economy have all contributed to the better forecast for the public finances that I was able to set out today.

9:35Stephanie Flanders:But that good news, a lot of that was related to the falling gilt yields. Some of that has been reversed even just today in the concerns in the markets and expectations of lower interest rates from the Bank of England, which traders in the market this week have decided are going to certainly not happen in March now, as they were expecting, and maybe not happen in the next few months?

9:57Rachel Reeves:I won't comment on market movements over a day or two. I think it is too early to know what the market impact is. Obviously, the immediate concern for the government is trying to get the 300 ,000 British citizens who are in the Middle East back home if they want to come back to the UK. I think around 100 ,000 have already registered for the scheme to say that you are there. And that is very welcome. And that's our immediate goal, as well as protecting our personnel and our assets in the region. But of course, the economic consequences of any extended military action, especially in the Middle East, which is so crucial for trade and for oil and gas would have an impact on the UK economy.

10:49Rachel Reeves:But it is too early to judge exactly what that will be and therefore what response would be needed.

10:54Stephanie Flanders:And I mean, our focus is on the economy today. I'm not going to go into the government stance in relation to the support or not for what the president's doing. But judging from Donald Trump's posts and interviews in the last 24 hours, he does seem to be not very happy with the prime minister as a result of the last few days. Do you worry that that will make it harder to finalise, finally finalise the trade situation, the trade deal with the US, which was put into quite a lot of uncertainty by that Supreme Court judgment a few weeks ago?

11:25Rachel Reeves:When it comes to decisions around using British armed forces to take part in conflicts around the world, it is very important that we judge those on whether it is legal and whether it is the right thing to do. You can't make a decision about whether to get British armed forces involved in a conflict because it may or may not make it more likely to get a trade deal. And we judged that there was not a legal basis for offensive action on Iran. But of course, once Iran responded, particularly...

12:06Stephanie Flanders:Sorry, not a legal basis for the UK, but presumably not for the US either?

12:10Rachel Reeves:Well, we can only make judgments for ourselves and that was the judgment that we came to based on our legal advice and it's up to other countries to explain what action they've taken and on what basis. But once Iran responded in the way that they did including with missiles being launched into our allies who were not involved in the offensive action and the risks to our military bases in Cyprus. Of course, it was right that we became involved in defensive action. And we were involved in that from Saturday. And of course, on Sunday, we gave permission for US jets to use British assets from which to launch those defensive actions.

12:56Rachel Reeves:And that's a decision that we've taken as a government. On trade, I'm proud of what we've done as a government. we've secured a trade deal with India. I think probably the best trade deal that any country in the world has secured with India. And we hope to be able to bring that into effect in the next couple of months. But in addition, improving our trade relations with our nearest neighbours and trading partners in the European Union. And I'm going to say more about our relations with the European Union in a speech I'm going to give in a couple of weeks time, because I think that that is one of the big bets that we can take as a country to change our trajectory for productivity and growth.

13:34Rachel Reeves:We've already rejoining the Erasmus scheme to allow young people to be able to study in European Union countries and the young people in those countries to be able to study in the UK. But we also want to deliver an energy and electricity trading deal. We want a food and farming agreement, an SPS agreement. And also we want to bring in a youth mobility scheme so that Young people in Britain can go and take advantage of opportunities in Europe and vice versa. Young people in the European Union can come and work in the UK. I know that some countries around the world are looking to pull up the drawbridge, but Britain benefits from being an open trading economy, open to trade, open to investment and also open to talent.

14:18Stephanie Flanders:But for trade, it's enormously important just to have some kind of certainty about what the trade rules are. I mean, are you able to say to UK exporters to the US that you know currently what the trade rules are for going into the US? Because it's not clear to us.

14:34Rachel Reeves:Well, we secured a trade deal with the US last year on the export of goods. Since then, we've gone further and secured a deal around pharmaceuticals, which is obviously crucial for the UK, given the importance of our pharmaceuticals sector.

14:48Stephanie Flanders:As far as you're concerned, those things are not affected by the Supreme Court ruling, as far as you're concerned.

14:52Rachel Reeves:Obviously, we are in constant negotiation and dialogue with the US administration, but there's absolutely no reason why the trade deal that we secured last year can't be maintained. And of course, there are other areas as well where we want to go further with our trade links with the US, whether that is on the future of capital markets, where we want to deepen and strengthen the capital market links between our economy, making it easier for British companies to raise finance in the US and US businesses to raise finance in London, as well as doing more in terms of mutual recognition of standards so that if you have a license or a product in the US, you can bring it to the UK.

15:33Rachel Reeves:and again vice versa to help British businesses in financial services and elsewhere to be able to launch product products in the US which is obviously hugely beneficial for the UK firms. So there are other areas as well where we want to deepen those relations with the US, but our nearest neighbours and trading partners are countries in the EU and the benefits from rebuilding trust between us and the European Union and crucially those trade links in goods and I hope in services in due course, is what will have the biggest impact on British businesses and jobs and living standards.

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