A prolonged war in the Middle East is currently viewed as the primary risk to the global economy, with particular implications for Cyprus due to its high dependence on costly energy imports. Concerns over a possible closure of the Strait of Hormuz, through which around 20 per cent of global oil supplies and significant volumes of LNG pass, have triggered negative market assessments and driven energy prices upwards.
Disruption to the production and transport of oil and natural gas could usher in a new period of persistently high prices, increasing inflationary pressures worldwide. In Cyprus, higher international oil prices would be reflected both at fuel pumps and in electricity tariffs.
Market reaction and energy prices
Investor sentiment indicates expectations that the conflict involving the United States, Israel and Iran will last weeks rather than days. Oil prices surpassed 85 dollars per barrel on Tuesday before easing towards 80 dollars. European gas prices nearly doubled.
The Dutch TTF futures contract, regarded as the European benchmark, rose by more than 23 per cent on Tuesday following a surge of over 33 per cent, reaching 59.445 euros per megawatt hour. This marked the highest level since February 2023, when prices spiked due to the war in Ukraine.
Rising energy prices triggered broad declines in equities and bond values, as higher inflation would increase the cost of living and constrain consumption and investment.
“It’s panic selling. The market had been indifferent to the scale of this war before the weekend,” Emmanuel Cau, Head of European Equity Strategy at Barclays, told the Financial Times.
“I don’t think we’ve seen the worst yet in terms of oil supply concerns,” said Elliot Hentov, Head of Macro Policy Research at State Street Investment Management. “Short-term threats to oil infrastructure are credible and sufficient to constrain shipping.”
Gold prices, which rose on Monday as investors sought safe havens, fell on Tuesday alongside equities and bonds, suggesting that some investors may be liquidating positions to cover losses.
“People are reducing risk,” said Peter Schaffrik, macro strategist at RBC Capital Markets. “The market appears to be shifting psychologically from a short war to a prolonged conflict.”
China and the Strait of Hormuz
China, the world’s largest LNG importer, has called for the safe passage of vessels through the Strait of Hormuz. According to Bloomberg, senior industry executives report that Beijing is pressing Iranian officials to avoid actions that could disrupt Qatar’s gas exports.
The potential closure of the strait remains a central concern for energy markets.
Inflation at 0.9 per cent in Cyprus
These developments threaten the stabilisation path of inflation in the eurozone and Cyprus.
According to Eurostat data released on Tuesday, inflation in Cyprus slowed to 0.9 per cent in February, down from 1.2 per cent in January, the lowest rate recorded in Europe. Annual inflation in the eurozone is estimated at 1.9 per cent in February 2026, up from 1.7 per cent in January.
Among the main components of eurozone inflation, services are expected to record the highest annual rate in February at 3.4 per cent, compared with 3.2 per cent in January. This is followed by food, alcohol and tobacco at 2.6 per cent, unchanged from January; non-energy industrial goods at 0.7 per cent, up from 0.4 per cent; and energy at minus 3.2 per cent, compared with minus 4.0 per cent in January.
Energy remains the component keeping inflation relatively subdued in the eurozone.
Central bankers warn of energy shock
Central bankers have highlighted the inflationary risks associated with a prolonged Middle East conflict.
European Central Bank Executive Board member Philip Lane, in an interview with the Financial Times, expressed concern about potential impacts on energy prices and, consequently, on inflation and economic activity.
A significant energy shock, he said, could push inflation higher and slow growth, making close monitoring of geopolitical developments a key element of the ECB’s response.
Interest rate outlook
Monetary policy represents the next link in the chain of potential impacts. In the immediate term, prospects for rate cuts appear to be receding.
Bank of Greece Governor Yannis Stournaras told Reuters that the ECB should not rush to alter interest rates, as the war involving Iran may exert upward pressure on inflation and growth.
He noted that the consequences of the conflict, particularly through energy markets and supply chains, will largely depend on its duration and escalation.
“If negotiations start tomorrow, there will be de-escalation,” he said in a telephone interview. “If it continues, there will be upward pressure on inflation. I cannot rule out either scenario. Therefore, we must show flexibility.”
Stournaras added that it is too early for firm conclusions and stressed that, for now, the ECB should avoid hasty changes to monetary policy.
Nigel Green, Chief Executive of deVere Group, one of the world’s largest independent financial advisory organisations, warned that investors should prepare for higher interest rates due to the escalation with Iran.
“Markets had positioned for lower borrowing costs, but that outlook is now under threat. A new energy shock reduces the scope for rate cuts and increases the likelihood that monetary policy will remain restrictive for longer than investors had assumed,” he said.
“This is not a typical episode of volatility driven purely by sentiment. It is a supply-side shock with tangible macroeconomic consequences. Monetary policy flexibility will narrow as inflationary pressures intensify,” he added.