Central Banks Urged to Stay Calm Amid Iran Crisis-Driven Energy Price Surge

The Bank for International Settlements (BIS), the advisory body for the world’s central banks, has cautioned against overreacting to the recent spike in global energy prices due to the Iran crisis, calling it a textbook scenario to overlook a temporary shock. This year's 40% increase in oil prices and a near 60% rise in wholesale gas prices have revived memories of 2022 when inflation soared following Russia’s invasion of Ukraine and the global economy's post-COVID reopening.

Leading central banks, including the U.S. Federal Reserve and European Central Bank, reacted slowly in 2022, raising interest rates to unprecedented levels after underestimating the inflation's permanence. Now, financial markets are adjusting expectations, anticipating that central banks will learn from past misjudgments. However, the BIS emphasizes caution, stating that temporary supply shocks should not trigger immediate monetary policy alterations, as per Hyun Song Shin, the BIS's lead economic advisor.

Central banks like the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan have crucial meetings this week, amid which the BIS released a report discussing central banks' communication strategies post-crisis. It highlighted that banks now more frequently use scenarios to address risks, shifting away from forward guidance to project their own rate trajectories. BIS also flagged notable market risks, such as volatility in AI stocks and private credit markets, though no significant disruptions are observed yet.