The European Central Bank warned on Thursday that the energy shock caused by the war in the Middle East would push up inflation sharply and hit eurozone growth this year.

Eurozone interest rate setters joined other major central banks around the world in keeping borrowing costs steady as they assess the impact of higher oil and gas prices.

But they issued a stark warning that the war had “made the outlook significantly more uncertain”, with higher inflation and lower growth at risk.

“Higher energy prices will have a material impact on inflation in the near term,” the ECB said in a statement.

But he also stressed that it was “well-positioned to navigate this uncertainty. Inflation is around the two percent target… and the economy has shown resilience in recent quarters”.

The central bank released new forecasts that eurozone inflation will rise to 2.6 percent this year – above its two percent target and higher than its pre-war forecast of 1.9 percent in December.

It cut its 2026 growth forecast for this year to 0.9 percent, from 1.2 percent in December.

The 21-nation euro zone is heavily dependent on energy imports, making it vulnerable to the fallout of war, which pits allies the United States and Israel against Iran.

Oil and gas prices rose again on Thursday after Iran struck the world’s largest liquefied natural gas (LNG) facility in Qatar and threatened to destroy the region’s energy infrastructure.

The Strait of Hormuz, a critical route for global energy exports, has been almost completely blocked to oil and gas tankers since the start of the war.

A jump in inflation would weigh on households and businesses — with energy-hungry manufacturers hit particularly hard — and could dampen eurozone growth, which already lags behind rivals the United States and China.

– Questions on Lagarde’s future –

But while higher consumer prices typically lead to rate hikes, price increases have yet to show up in the data.

The official eurozone inflation rate for February was 1.9 percent. Eurozone benchmark interest rates have been at two percent since June.

Other major central banks meeting this week have taken a similar approach.

The US The Federal Reserve raised inflation estimates, citing “uncertain” conditions caused by the war, while keeping borrowing costs on hold for a second straight meeting.

The central bank of Japan, a country heavily dependent on Middle East oil imports, warned that higher crude prices would fuel inflation as its rates stagnated.

The Bank of England, which was expected to cut rates in March before war broke out, kept borrowing costs steady.

BoE Governor Andrew Bailey warned that a protracted conflict and sustained high oil and gas costs “will feed into higher household energy bills”.

All eyes will now be on ECB chief Christine Lagarde’s post-rate call news conference.

She will likely repeat the message she gave last week – that officials will do “whatever it takes” to keep inflation under control.

Still, most economists also expect her to repeat recent comments that rates remain “in a good place,” at least for now.

She may also try to play down parallels with the inflation shock that follows Russia’s 2022 full-scale invasion of Ukraine, while the ECB has been criticized for being too slow to raise rates.

Still, investors are looking for any signs that a rate hike could be on the horizon at the ECB’s next meeting, in April or June, although Lagarde is expected to remain tight-lipped.

She may also face questions over her future after the Financial Times reported last month, citing an unnamed source, that she would step down before her term ends in October 2027.

She has since insisted that her “baseline” is that she will serve out her term.