The European Central Bank (ECB) is now carefully watching a new crisis unfolding in the Middle East.
A recent series of events in the Strait of Hormuz, a vital channel for about 20% of the world's oil, has put global markets on edge. Attacks and rising geopolitical tensions led war-risk insurers to cancel coverage, causing major shipping companies to halt transit. QatarEnergy, a major liquefied natural gas (LNG) producer, even declared 'force majeure', a clause that frees it from contractual obligations due to unforeseen circumstances. This effectively created a bottleneck, causing immediate and sharp price increases. Brent crude oil jumped about 15%, and European natural gas prices (Dutch TTF) spiked over 45% in just a few days.
This situation presents a serious two-sided problem for the ECB. First, the surge in energy prices directly pushes up headline inflation. This is particularly worrisome as it comes just when February's inflation data showed a slight uptick to 1.9%, complicating what had been a smooth path down to the 2% target. The central bank is keen to avoid repeating its 2021-22 mistake of underestimating inflationary pressures.
Second, the disruption threatens to derail the Eurozone's fragile economic recovery. The economy grew by a modest 0.3% in the last quarter of 2025, leaving it with little buffer to absorb a new shock. Higher energy costs act like a tax on consumers and businesses, while the overall uncertainty and trade friction can dampen investment and demand. This is precisely the stagflationary risk that ECB board member Olli Rehn highlighted: a scenario where inflation rises while economic growth stalls or falls.
For now, the ECB is adopting a 'wait-and-see' approach. If the disruption is short-lived, the economic impact may be manageable. The bank can look past a temporary inflation blip, especially since underlying wage pressures have been cooling. However, if the blockade becomes a prolonged crisis, the ECB would face the tough trade-off it desperately wants to avoid: choosing between raising interest rates to fight inflation (and risk a recession) or holding them steady to support growth (and risk inflation expectations becoming unanchored). The duration of the Hormuz disruption is now the most critical factor for European economic policy.
- Glossary
- Strait of Hormuz: A narrow waterway between the Persian Gulf and the open ocean, through which a significant portion of the world's oil and LNG is transported.
- Headline Inflation: The total inflation in an economy, including volatile items like food and energy prices, which tend to fluctuate more than other goods and services.
- Stagflation: An economic condition characterized by slow economic growth, high unemployment, and rising prices (inflation).