By David Barwick – FRANKFURT (Econostream) – Bank for International Settlements General Manager Pablo Hernández de Cos on Thursday said central banks should remain focused on price stability and ready to act if inflation expectations show signs of de-anchoring, while noting that the monetary policy response to the Middle East energy shock depended on its magnitude.

Speaking at a press briefing on the BIS annual reports, with the material under embargo until today, de Cos said the global economy had shown surprising resilience in 2025 despite successive shocks, but that the new Middle East conflict had disrupted that backdrop.

Even with the reopening of the Strait of Hormuz, the effects could linger, he said. Production pauses, damaged facilities, shipping disruptions and the need to rebuild oil reserves could keep price pressures elevated, he said.

On monetary policy, the BIS message was clear, de Cos said: central banks “should remain focused on price stability.”

What this meant in practice depended on the economic conditions facing each jurisdiction, he said.

The key was central banks’ commitment to price stability and their readiness to act if they observed a de-anchoring of inflation expectations, he said.

Asked whether a measured adjustment of rates was appropriate given the easing of the shock, de Cos said the size of the monetary policy response depended crucially on the size of the shock.

“[T]he situation today as compared to two weeks ago is completely different,” he said.

If the current situation proved sustainable, “this will surely be taken into account” by central banks, he said.

Normalization in the Middle East was good news and probably meant more severe scenarios had been avoided, Hernández de Cos said. Still, he said oil markets would take time to normalize.

The shock came in a context in which inflation was already high and memories of the 2021-2022 inflation surge remained fresh, increasing the potential risk of second-round effects, he said.

At the same time, there were important differences from 2022, including labor-market conditions and the fact that interest rates were now much higher than in 2021, he said.

Fiscal policy also needed to adjust, de Cos said.

Debt-to-GDP ratios were at historic highs in many jurisdictions, deficits remained high, and interest-rate and growth dynamics were less favorable for debt sustainability than in the past, he said.

“This is also the moment for fiscal consolidation,” he said.

Reducing deficits was not enough by itself, he said. The composition of consolidation efforts was also important.

De Cos said the BIS report identified a new fiscal-financial stability nexus, with high public debt increasingly financed through non-bank financial intermediaries.

The expanding role of hedge funds and other non-banks could amplify and accelerate market stress, he said.

Financial vulnerabilities persisted, with compressed risk premia, stretched asset valuations and core markets exposed to rollover risk from highly leveraged hedge funds, he said.

The increase in the role of leveraged non-bank financial intermediaries in sovereign debt meant regulation should be strengthened outside the banking sector, de Cos said.

The regulatory response to banks after the sovereign-bank nexus became a concern 10 to 15 years ago had made the banking system more resilient, he said. A similar effort was now needed for non-banks.

“Financial stability is a precondition for price stability,” he said.

Central banks would have to react in financial-stability episodes, but this could generate moral hazard, de Cos said.

The first safeguard was the design of central bank instruments, which should be temporary and well targeted, he said.

The second safeguard was stronger regulation and supervision of the entities most likely to generate such episodes, he said.

On artificial intelligence, de Cos said AI was the most transformative technological breakthrough of the current generation, but raised questions about work, income distribution, inflation and financial stability.

AI had supported growth through real and financial channels, but the current investment boom could come to an abrupt end if optimism reversed, he said.

The financing of AI was increasingly leveraged and involved complex interactions within the AI supply chain, he said.