Central banks of all countries should take measures to adapt market participants to scenarios that respond to rising energy prices due to the conflict in the Middle East. This was stated by Dan Katz, first deputy managing director of the International Monetary Fund (IMF).
“The conflict in the Middle East has introduced a significant new source of risk to the global economy, which until recently seemed quite resilient“, he said, speaking at the China Development Forum, which is being held in Beijing on March 22-23. “It is important that all central banks clearly articulate their potential response functions, including through scenario analysis, to prepare the market for possible policy directions if risks to inflation or output materialize.“
According to Katz, it remains difficult to assess the consequences of the current conflict in the Middle East. He specified that the very course of events forces policymakers to choose between “difficult alternatives“.
“It is still too early to make final decisions, as many things can change, but one thing is clear: both policymakers and businesses will need to adapt. Successive shocks have taught us that a stable policy framework and flexibility are crucial,“ the IMF deputy managing director added. “Recent experience has also shown that empowering the private sector to adapt and innovate in response to shocks can improve overall economic resilience.“
Katz acknowledged that governments could try to protect their populations by limiting energy price increases and introducing subsidy schemes. He explained that such measures would provide short-term relief but would be “budget-heavy“.
The IMF deputy managing director noted the “particularly complex“ circumstances in which central banks are now forced to formulate their policies. He explained that if high energy prices persist for a long time, financial regulators “may need to find a balance“ between the risks to maintaining price stability and the threat of an economic downturn, as well as the “potential for tightening financial conditions“.