With the flow of energy through the Middle East still mostly blocked and oil prices rising, policymakers in Europe are confronting the immediate impact of higher costs and trying to decipher the potential economic damage of a prolonged conflict.<\/p>\n
On Thursday, officials at the European Central Bank and Bank of England are expected to hold interest rates steady, but investors are betting that each central bank will raise rates at least twice later this year. Economists and lawmakers will be watching closely for signs about how the central banks will respond to jumps in inflation.<\/p>\n
The effective closing of the Strait of Hormuz, a vital waterway for fuel and other commodities off Iran\u2019s southern coast, has sharply increased energy prices. Brent crude, the international benchmark, has pushed well above $100 a barrel, while European natural gas prices are nearly 40 percent higher since the United States and Israel attacked Iran at the end of February.<\/p>\n
The war had an almost immediate impact on European inflation, increasing gasoline prices at the pump, airfares and other fuel-intensive activities. In Britain, the annual inflation rate climbed to 3.3 percent in March and is expected to stay around 3 percent through the second quarter, a percentage point above the central bank\u2019s target. For the 21 countries that use the euro, inflation averaged 2.6 percent in March, up from 1.9 percent a month earlier.<\/p>\n
But for the central banks, the question is whether higher prices will ripple through the economy and eventually push up wages, potentially setting off a spiral of escalating prices that would warrant aggressive rate increases like those in 2022. For now, analysts say there isn\u2019t enough information on how the war, seemingly in a holding pattern<\/a>, will affect the economy. While President Trump has extended a cease-fire in the region, traffic through the strait remains sparse.<\/p>\n At the same time, the concern about inflation is being weighed against the possibility that the war damages economic growth. In that scenario, policymakers wouldn\u2019t want to tighten financial conditions. Consumer sentiment in Germany, the eurozone\u2019s largest economy, dropped to its lowest level in three years, data this week showed. This month, the International Monetary Fund<\/a> said the bloc\u2019s economy would grow 1.1 percent this year, but that assumed a relatively quick resolution to the war and the recovery of global energy markets.<\/p>\n \u201cThe E.C.B. will stay in \u2018wait and see\u2019 mode, at least for now,\u201d analysts at HSBC wrote in a note. But \u201cthe risk of prolonged energy supply disruption, coupled with risks of second-round effects on inflation,\u201d increase the probability of the central bank\u2019s raising interest rates later.<\/p>\n It\u2019s a dilemma facing central banks farther afield as well. This week, the Bank of Japan<\/a> voted to hold interest rates steady, but it was a split decision with several officials preferring an increase in rates. The central bank raised its inflation forecast while warning that economic growth is likely to slow this year.<\/p>\n