Energy Shock and Central Banks

The article discusses how the shock caused by the rise in energy prices resulting from the war between the United States and Iran has led to changes in central bank policies around the world. Previously, governments tended to ignore temporary price increases, considering them transient, which allowed for waiting until they subsided and opening the door to interest rate stabilization to avoid slowing economic growth. However, the continuation of the war, the rise in oil prices, and the repercussions of these factors prompted many central banks—including the Federal Reserve and the European Central Bank—to raise interest rates simultaneously, despite the associated risks. This shift was driven by declining confidence in the effectiveness of previous policies to control sustainable inflation. The accumulation of shocks and persistent inflation that spanned over five years has altered perceptions; inflation is no longer viewed as temporary. Instead, the need for tighter monetary policy has become greater, especially with oil prices reaching unprecedented levels, thereby increasing the likelihood of further interest rate hikes to prevent inflation from becoming a sustained phenomenon.

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