BIS Warns Central Banks: Don't Be Alarmed by Middle East Conflict — Energy Surge May Be Short-Term Impact

The Bank for International Settlements (BIS) urges policymakers at central banks worldwide not to overreact to the Middle East conflict, calling it a “textbook case”: when the shock may be only temporary, central banks should choose to “ignore its impact.”

Headquartered in Basel, Switzerland, BIS is known as the “central bank of central banks,” primarily responsible for promoting international monetary and financial cooperation.

Since the beginning of this month, international oil prices have risen about 40%, and wholesale natural gas prices have surged nearly 60%, reminiscent of the situation in 2022 when the Russia-Ukraine conflict erupted alongside global economic reopening, jointly driving inflation higher.

Subsequently, many major central banks around the world raised benchmark interest rates to levels not seen in decades. The Federal Reserve, European Central Bank, and others faced widespread criticism for being too slow to respond, keeping inflation high.

This time, financial markets have quickly adjusted expectations, betting that central banks will not make the same mistake again. However, BIS warns to remain cautious in its latest report.

Hyun Song Shin, BIS economic advisor, said, “If this is a supply shock, especially a temporary one, then according to textbook theory, central banks should ‘look through’ this shock rather than respond with monetary policy.”

Shin added that recent rapid changes in market interest rate pricing (with expectations that the Fed will cut rates only once this year and the ECB will hike rates in the second half) partly reflect people’s strong memories of 2022.

“It’s somewhat like a conditioned reflex,” Shin pointed out. Currently, key inflation indicators in Europe and the US have not shown similar magnitude changes, making the overall situation “very chaotic.”

The BIS report also mentions other market fluctuations this year, including sharp sell-offs in some AI-related stocks and pressures in the private credit market.

Frank Smets, BIS Deputy Head of the Monetary and Economic Department, said, “We need to keep an eye on these developments, but so far, we haven’t seen any major market dislocations.”

(Source: Caixin)