The Bank for International Settlements published an assessment of the monetary policy challenges arising from the recent Middle East energy shock, concluding that the appropriate response depends on the persistence of inflationary pressure and the severity of the impact on growth in each economy. Following the onset of the war in Iran, global oil supply contracted by nearly 15% over five months and oil prices rose more than 120% from prewar lows before moving toward pre-conflict levels amid substantial volatility. The inflation impact depends on factors including energy intensity, importer or exporter status, inflation expectations, fiscal policy and the initial monetary stance. Oil supply shocks can have more than twice the effect on inflation when expectations are above target, while tighter fiscal and monetary conditions can limit pass-through. The bulletin finds that current conditions do not generally appear to have increased economies’ vulnerability to inflation, as elevated household expectations are partly offset by weaker labor markets, smaller fiscal deficits and tighter monetary policy than in 2022. Central banks must balance waiting for greater clarity against the risk that second-round effects entrench inflation. Faster rate increases may be warranted where expectations risk becoming unanchored, while the trade-off is more difficult where the shock also causes a severe contraction in economic activity.
Bank for International Settlements2026-08-05
Bank for International Settlements finds major energy shock requires economy-specific monetary policy responses
The Bank for International Settlements finds that the recent energy shock requires different monetary policy responses across economies, depending on inflation persistence and the effect on growth. Global oil supply fell nearly 15% and prices rose more than 120% following the onset of the war in Iran. Central banks must weigh waiting for clarity against raising rates sooner to prevent second-round effects and unanchored inflation expectations.