Impact of energy price shock on central banks

The article discusses the impact of the energy price shock on the policies of global central banks, particularly amid the ongoing US-Israeli conflict with Iran, which has kept oil prices at high levels for several months. Previously, central banks relied on the assumption that these shocks were temporary and preferred to wait until markets calmed down to avoid the adverse effects of interest rate hikes on economic growth and the labor market. However, repeated crises and persistent inflation over more than five years, combined with a declining confidence that inflation would be temporary, have led central banks to abandon that belief. They are now pursuing simultaneous interest rate increases to combat the chronic inflation resulting from ongoing energy shocks. The rise in oil prices, exceeding $100 per barrel, has also increased the likelihood of rate hikes in the United States, Europe, and other markets, despite the differing economic conditions among countries. The article emphasizes that delaying action today could be more dangerous, as inflation has become more stubborn, and the slowdown caused by tightening policies could backfire—especially with consumer and business confidence in the ability of central banks to restore price stability waning.

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