Central banks in Europe and Japan paused rate hikes on Thursday, but traders now see a reversal. Energy prices spiked after attacks on Gulf infrastructure, sending Brent crude to $115 a barrel and European gas up 35 percent. The shock has pushed inflation expectations higher, prompting a shift from cuts to hikes.

The Bank of England, which held rates at 3.75 percent, reversed its earlier plan for two cuts this year. Governor Andrew Bailey said the Middle East war would lift household energy bills and feed into higher inflation. Market odds now favor two rate increases, a sharp turnaround from the 80‑percent chance of a cut last month.

The European Central Bank kept its policy rate at 2 percent, but revised its inflation outlook to an average of 2.6 percent this year, up from a 1.9‑percent forecast. The Bank of Japan also held rates at 0.75 percent, delaying a potential hike that had been eyed for next month. All three banks signal a more hawkish stance amid supply shocks.

Investors now weigh the risk of second‑round inflation as higher energy costs could push wages up, tightening the policy cycle. Central bankers emphasize that the Middle East conflict’s duration will dictate the pace of tightening. The shift from cuts to hikes underscores the fragility of the post‑war recovery and the need for vigilant monitoring.