Türkiye's central bank governor warned Wednesday that energy shocks could have longer-lasting effects on inflation if cost pressures spill over into wages and prices, saying repeated supply disruptions could make it harder for policymakers to contain price increases.
Central banks could limit the initial impact of energy shocks through timely and restrictive measures, but second-round effects require close monitoring, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told a summit in Budapest.
Since the United States and Israel launched attacks on Iran in late February, fears of supply disruption have pushed oil prices sharply higher, with the surge in energy costs feeding into fuel and transport prices and lifting global inflation expectations.
Attacks since late August on military, shipping and energy assets across the Middle East have sent oil prices back above $100 a barrel and revived fears about a wave of price hikes.
That price outlook, coupled with the relentless surge in energy costs, has bolstered market bets for rate hikes by the world's biggest central banks.
Karahan said central banks are accustomed to economic disruptions, adding that the shocks currently affecting the global economy were lasting longer than in previous periods.
The global production structure has changed significantly over the past 20 to 30 years, as companies built extensive supply chains and countries became more economically interdependent, said Karahan, as cited by the Turkish media.
These links need to be properly assessed during periods of change, he noted, particularly as energy-related supply shocks pass through to inflation.
While initial price effects could be contained through policy measures, the process could become more complex if shocks affected wages, pricing behavior and inflation expectations, Karahan said.
He added that successive supply shocks could make inflationary pressures more persistent and increase the need for longer-term policy solutions.
Karahan said central banks should focus not only on the initial movement in prices but also on the impact of supply shocks on inflation expectations and pricing behavior.
Well-anchored inflation expectations give central banks greater room to respond to first-round effects, he said. However, controlling the impact becomes more difficult when shocks spread to wages, prices and exchange rates.
The risk is particularly significant for emerging markets, where external shocks can have a stronger impact on exchange rates if inflation expectations are not sufficiently anchored, he said.
Karahan said geopolitical tensions in the Middle East were creating upward pressure on energy prices.
A tighter monetary policy stance could be one of the tools used to limit the risk that deterioration in the inflation outlook becomes permanent, he said.
Fiscal policy could also help soften the initial impact of energy shocks on prices, Karahan added, saying monetary and fiscal policies could support each other during such periods.
Karahan said growing fragmentation in the global economy was affecting central banks' reserve-management decisions.
Gold has distinct characteristics as a commodity, financial asset and reserve instrument, he said, adding that central banks had recently increased their focus on gold.
However, this did not mean that the dollar's dominant position in the international monetary system would change rapidly, Karahan said.
The dollar's deep and highly liquid markets continued to support its position in the global reserve system, he added.
Geopolitical risks, financial pressures and uncertainty over market access were also influencing reserve preferences, while central banks' demand for gold remained strong, Karahan said.
Reserve management has traditionally been based on three factors – security, liquidity and return – but access should now be added to that framework, Karahan said.
Some reserve assets considered liquid under normal conditions may not be equally accessible during periods of market stress, he noted.
As a result, the total size of reserves is not the only relevant measure. Their practical usability when needed is also important, he said.
Karahan said gold had long played an important role in Türkiye's financial system and remained one of the main savings instruments for households.
A significant amount of gold is held physically outside the financial system, while gold deposits also represent an important part of the banking system, he said.
The central bank supports balance in the gold market through reserve requirements, swap transactions and other measures, Karahan added.
Higher gold prices can increase the value of reserves and gold's share of total reserves, but this does not mean that available liquidity rises by the same amount, he said.
"The more important question is not how much we have, but how much of what we have we can use, particularly under stress scenarios," Karahan said.
Karahan said global economic integration had boosted efficiency and created disinflationary effects for many years.
However, as economic ties increasingly became part of geopolitical competition, policymakers could no longer assume that the conditions of the previous period would continue unchanged, he said.
