Focus should be on price stability as supply shocks rise, says BIS chief Pablo Hernández de Cos

Central banks must monitor the potential secondary impacts stemming from surging energy costs, according to Bank for International Settlements Chief Pablo Hernández de Cos. During an interview with Deepshikha Sikarwar, Hernández de Cos, a former Spanish central bank chief, is currently attending the Global Fintech Fest in Mumbai. He emphasized the importance of international regulatory cooperation to tackle the challenges posed by advanced AI technology, regulate stablecoins, and minimize adverse effects.

The West Asia crisis and recent geopolitical events have exposed economies to supply shocks. Hernández de Cos noted that over the past six years, the global economy has experienced a series of negative supply shocks, commencing with the pandemic, followed by the war in Ukraine, the tariff shock, and recently the Middle East conflict. These supply shocks present significant challenges for policymakers as they can lead to short-term growth contraction and short-term inflation spikes.

Central banks need to conduct thorough analyses of these impacts in the medium run to determine the appropriate monetary policy response. High oil and other commodity prices have indeed contributed to inflationary pressures in various economies, but the extent to which these price increases have affected the core inflation and other components of the consumption basket varies across nations.

To mitigate the effects of sudden and repeated supply shocks, Hernández de Cos advised that central banks should prioritize price stability. They must closely monitor the potential second-round effects of rising energy prices on inflation expectations, which should inform their monetary-policy responses. While central banks cannot solve all problems arising from such shocks, they play a crucial role in managing their consequences.