The euro zone experienced a sharp rise in inflation in April, with consumer prices jumping to 3%, up from 2.6% in March and 1.9% the previous month, according to flash data released Thursday [6]. This surge was primarily driven by energy costs, which increased by 10.9% compared to 5.1% in March, as the ongoing Iran conflict and the blockade of the Strait of Hormuz fueled supply fears and elevated oil prices [2][6]. Brent crude reached USD 124–126 per barrel, marking a new high since the start of the US-Iran war, with Polymarket investors assigning less than a 30% probability of normalised traffic through the Strait by the end of May [2]. The region's economic growth nearly stalled, with first quarter GDP expanding by only 0.1% [6].
The European Central Bank (ECB) is widely expected to hold its benchmark interest rate at 2% as it assesses the inflationary pressures caused by the Iran war and rising fuel prices [1][6]. Societe Generale strategists note that the ECB is leaning towards a hawkish stance but will likely keep rates unchanged today, citing unresolved Gulf tensions and the risk that a future rate hike could become more contentious if growth deteriorates further [1]. Morgan Stanley analysts echoed this sentiment, stating that short-term risks to core inflation are contained, as core inflation cooled to 2.2% in April from 2.3% in March, and the data do not point to the need for the ECB to act fast [6].
Economists warn that Europe may be entering a period of stagflation, characterized by low growth, rising inflation, and unemployment, as the Iran war prompts a global energy crunch and undermines business and consumer confidence [6]. The ECB faces a dilemma: raising rates to control inflation could further dampen economic activity and consumer sentiment, while the principal source of inflation—energy price rises due to the Iran conflict—is beyond its control [1][6].
Elsewhere, the Bank of England (BoE) is also expected to keep rates unchanged at 3.75%, with Deutsche Bank highlighting two-sided risks as growth forecasts are cut and inflation projections raised [4]. ING suggests that BoE tightening expectations are excessive compared to the ECB, and anticipates dovish repricing after the meeting, with UK political uncertainty adding upside risks for EUR/GBP [3]. In the US, the Federal Open Market Committee (FOMC) left rates at 3.50–3.75%, with internal dissent over easing bias and Rabobank projecting two rate cuts under an incoming Chair Warsh, though risks are skewed toward fewer cuts [5].
CONCLUSION
The euro zone is grappling with surging inflation and near-stagnant growth as oil prices spike due to the Iran conflict and Hormuz blockade. Central banks, including the ECB and BoE, are holding rates steady amid heightened uncertainty, with policymakers cautious about exacerbating weak economic conditions. Market sentiment remains negative, reflecting concerns over stagflation and persistent energy-driven inflation risks.