Iran War Energy Shock Fuels Stagflation and Central-Bank Dilemmas

The closure of the Strait of Hormuz after the United States and Israel attacked Iran at the end of February 2026 has choked a fuel artery. Brent crude rose to about $112 per barrel, more than 50 % above pre-war levels, and European natural-gas prices jumped roughly 40 %.

New York Times

In March, Britain’s CPI hit 3.3 % and the euro-area average rose to 2.6 %, both above targets. U.S. consumers expect 4.7 % inflation over the next year, up from 3.8 % a month earlier. The IMF projects euro-zone growth at 1.1 % for 2026, while NIESR cuts UK growth to 0.9 % and sees inflation returning to 2 % only by 2028.

New York Times

The European Central Bank and the Bank of England are both expected to keep rates unchanged on April 30. The BoE’s Monetary Policy Committee is forecast to vote 8-1 to hold the Bank Rate at 3.75 %, while its Monetary Policy Report will raise inflation forecasts and lower growth outlooks. Federal Reserve Chair Jerome Powell described U.S. growth as “solid” despite the energy shock, limiting pressure for rate cuts.

Bank of England set to hold at 3.75% as Iran war forces stagflation reckoning

RBC BlueBay’s Mike Bell warned that recession odds in Europe, the UK and parts of Asia exceed equity pricing. Citi’s adverse scenario envisions Brent at $120, inflation near 5 % and global growth below 2 %. ING’s Carsten Brzeski said another month of Hormuz disruption could trigger a euro-zone recession, while BNP Paribas expects two UK rate hikes in 2026 as inflation may peak near 4.5 %.

Reuters

Inflation timelines diverge: NIESR sees UK inflation reaching 2 % only by 2028, while the IMF assumes a quicker euro-zone recovery if energy markets stabilise. Recession probabilities also vary—Germany’s IMK estimates a 34 % chance of a second-quarter recession, up from 12 % a month earlier, while other analysts describe the risk as “higher than priced.” Data on how borrowing costs affect financial conditions remain inconclusive.

Reuters

• “The probability of a recession in Europe, the UK, and parts of Asia, is higher than is priced into equity markets,” — Mike Bell, RBC BlueBay

Reuters

• “Federal Reserve Chair Jerome Powell said the US economy has been expanding at a “solid pace” amid the Iran war energy shock, with consumer spending and data center investment holding strong.” — Jerome Powell, Federal Reserve

Powell: US economy growing at ‘solid pace’ despite Iran war energy shock

• “Pill has explicitly cautioned against a "wait-and-see" approach, arguing that waiting for second-round effects from energy prices to materialise before acting risks falling behind the curve.” — Huw Pill, Bank of England

Bank of England set to hold at 3.75% as Iran war forces stagflation reckoning

• “Bailey has taken the opposite public position, telling investors that bets on rate hikes this year are premature given the extent of uncertainty around the war's duration and economic consequences.” — Andrew Bailey, BoE Governor

Bank of England set to hold at 3.75% as Iran war forces stagflation reckoning

The BoE’s Monetary Policy Report, due April 30, will detail the revised inflation and growth outlook behind the 8-1 hold vote. The ECB will announce its rate decision the same day, and the Fed’s June and July FOMC meetings will test whether the “solid” U.S. growth view holds. Markets will watch for any escalation in Hormuz closure, which could deepen stagflation pressures across Europe, the UK and Asia.

Bank of England set to hold at 3.75% as Iran war forces stagflation reckoning