The Royal Navy has dispatched assets to the Gulf following an Iranian sea drone rescue that has raised fears of naval escalation. This is a move that will cost the British taxpayer a pretty penny, and I suspect the markets will take note. The incident has all the hallmarks of a classic geopolitical risk premium being baked into oil prices, and gilt yields will likely reflect a shift in sentiment away from risk assets.
The Admiralty is putting on a show of force, but in the City we know that the true measure of power is fiscal credibility. The stock market will view this as a negative externality, a drag on already fragile economic growth. The Bank of England may be forced to revise its outlook on inflation if energy supplies are disrupted.
The bottom line: this is expensive and it makes the UK less attractive to foreign capital.
