LONDON, March 16 - The Bank for International Settlements (BIS), the institutional forum for global central banks, has urged policymakers to exercise restraint in reacting to the recent spike in energy prices tied to the Iran crisis. The BIS described the episode as a textbook example of a supply shock that monetary authorities should consider looking through if it turns out to be temporary.
This month has seen a roughly 40% jump in oil prices and nearly a 60% rise in wholesale gas costs, movements that have revived comparisons to the inflationary pressures of 2022. At that time, the combination of Russia's invasion of Ukraine and the reopening of economies following the COVID-19 pandemic coincided with sharp rises in inflation and prompted major central banks to lift interest rates to multi-decade highs. Policymakers faced criticism then for underestimating how persistent those price pressures would be, a factor that has had an evident influence on market and policy reactions this year.
Despite memories of 2022, the BIS used its latest quarterly report to stress caution. Hyun Song Shin, the BIS' chief economic adviser, said: "If it’s a supply shock, and certainly if it’s a temporary one, these are the textbook examples where you should look through and not react with monetary policy." His comments were framed ahead of a pivotal week in which the Federal Reserve, European Central Bank, Bank of England and Bank of Japan are scheduled to hold their first meetings since the outbreak of the Middle East tensions on February 28.
Markets have been quick to adjust. Money market pricing has cut in half the number of Federal Reserve rate cuts expected this year, bringing that total to one, and now fully prices in an ECB hike by July with an 85% probability of a second ECB increase by year-end. The BIS flagged those market moves as potentially rapid and reflexive.
Shin described the velocity of changing rate expectations as perhaps "a sign of the times," driven by the fresh but still vivid memories of the central bank errors attributed to 2022. He also warned that the speed of market repricing may not align with underlying inflation data, noting that headline measures had not yet moved to the same extent as financial market pricing, creating "a very confusing picture."
Beyond its central message about rate setting, the BIS report examined how central banks have altered their public communication strategies in response to recent crises. The report found that more central banks are employing scenario analysis to convey potential outcomes associated with specific risks, supplementing traditional tools such as fan charts and qualitative risk discussions. It also observed a shift away from relying solely on forward guidance about future rate paths toward publishing explicit rate projections, often framed within alternative scenarios.
The BIS did not confine its assessment to energy markets. The report also flagged other bouts of market volatility seen this year, citing steep selloffs in stocks linked to artificial intelligence themes and strains in the private credit market. Frank Smets, deputy head of the BIS' monetary and economic department, said: "We have to watch this. But we don’t see any major disruptions at this point."
The BIS' advice highlights the tension facing central banks: respond quickly to market developments to avoid repeating past mistakes, or pause to assess whether price moves are transient and therefore should not trigger a policy shift. With major central bank meetings imminent and markets having already moved sharply, the debate over when to act remains a central question for policymakers and market participants alike.
Contextual note: The BIS publishes this type of report quarterly, and the recent edition combines regular surveillance with dedicated studies on central bank practices and current market risks.