The National Institute of Economic and Social Research (Niesr) has warned that the UK economy will suffer a hit to growth of at least 0.5 percentage points this year due to the Iran war, cutting the forecast to 0.9% from 1.4%. The report comes amid rising inflation that is expected to exceed 4% early next year, prompting the Bank of England to consider aggressive rate hikes that could undermine growth and increase unemployment. If oil prices surge to $140 per barrel, the Bank’s Monetary Policy Committee could raise rates by 150 basis points, undoing six cuts since July 2024. Inflation would still reach over 5% in 2027. The Chancellor’s fiscal headroom of £23.6bn would all but evaporate, and the economy could shrink by £35bn. Stephen Millard, deputy director for Macroeconomics at Niesr, said the renewed period of instability would force tough choices for the Treasury and the Bank. David Aikman, Niesr’s director, warned that the energy price shock would leave households poorer and businesses suffering higher costs. Vicky Pryce, economist, noted that the UK entered the crisis with higher inflation and interest rates than comparable countries, amplifying long‑term risks. Jack Meaning, chief UK economist at Barclays, cautioned that the Bank may have to set rates high enough to curb inflation at the cost of higher unemployment and weaker growth. Despite the bleak outlook, the report suggests that lifting restrictions on new licences for North Sea oil and gas exploration would not immediately alleviate economic pressures but could better prepare the sector for future shocks. Energy storage and imported energy supply policies remain key lessons for the UK.