Europe's Central Bank Paused Its Rate Cuts. Stagflation Is the Word No One Wants to Say.

The European Central Bank had been on a path toward lower interest rates heading into 2026, with its deposit rate at 2% and inflation broadly near target. That plan hit a wall on March 19 when the ECB postponed its planned rate reductions, raised its 2026 inflation forecast, and cut its GDP growth projections. The trigger was the Strait of Hormuz closure, which sent European natural gas prices nearly doubling to above €60 per MWh, a level that makes running factories, heating homes, and keeping businesses open dramatically more expensive.

European gas storage was at just 30% capacity heading into March, unusually low after a cold winter. That made the continent especially vulnerable to a supply shock. UK inflation is now expected to breach 5% in 2026. Germany and Italy, Europe's two largest industrial economies, face the highest risk of slipping into technical recession if the maritime blockade persists through summer.

Shell has warned that Europe could face fuel shortages as early as April. Chemical and steel manufacturers have already imposed surcharges of up to 30% to offset rising electricity costs. Spain is something of an exception: with nearly 60% of its electricity generated from solar and wind, and another 20% from nuclear, its power prices have remained far more stable than the rest of the continent.

ECB deposit rate: 2.0% — Rate cuts postponed on March 19

Dutch TTF gas benchmark: >€60/MWh — Nearly doubled since Hormuz closure

European gas storage (March entry): ~30% capacity — Historically low after hard winter

UK inflation forecast 2026: >5% — Revised sharply higher