The Bank for International Settlements has warned governments against using broad fiscal stimulus to offset the economic fallout from higher energy costs and geopolitical disruptions, arguing that poorly targeted support could intensify inflation pressures and force central banks into more restrictive policy.

The warning, delivered by BIS General Manager Pablo Hernández de Cos in an interview with Japan’s Nikkei and reported by Reuters on May 11, comes as governments face renewed pressure to shield households and businesses from the effects of the Middle East conflict, volatile oil prices and softer growth expectations. De Cos said fiscal measures should remain “targeted and temporary,” adding that broader and more persistent support would raise inflationary risks and could compel central banks to lift interest rates, weighing on growth.

The message places fiscal policy at the center of the next phase of the inflation debate. During the pandemic and the energy shock that followed Russia’s invasion of Ukraine, governments deployed large-scale transfers, subsidies and credit guarantees to cushion private-sector balance sheets. Those interventions helped avoid deeper recessions but also left public debt higher and complicated the work of monetary authorities as inflation accelerated across major economies.

The BIS is now signaling that a repeat of broad-based fiscal support would be more difficult to justify in an environment where inflation expectations remain sensitive, energy prices are vulnerable to geopolitical shocks and public-debt ratios are already elevated. The institution’s argument is not that governments should avoid all intervention. Rather, it is that support should be narrowly designed for households and firms most exposed to the shock, and that it should not become a lasting addition to demand at a time when central banks are still guarding against second-round inflation effects.

That distinction matters for central banks. A temporary supply shock, such as a short-lived rise in oil or shipping costs, may not require a monetary-policy response if inflation expectations remain anchored and wages do not adjust in a way that embeds the shock into the broader price structure. De Cos said central banks can look through temporary negative supply shocks under those conditions. But he also warned that the approach becomes less sustainable if the shock persists, especially after the post-pandemic inflation episode made households, firms and markets more alert to the possibility of renewed price pressures.

The practical implication is that fiscal authorities can either help central banks or make their task harder. Targeted relief can limit social and economic damage without adding materially to aggregate demand. Broad stimulus, by contrast, can increase purchasing power across the economy, support demand when supply is constrained and make it more likely that central banks respond with higher interest rates. That would turn fiscal support into a policy mix that cushions the initial shock but raises the risk of weaker growth later.

The BIS comments also reflect concern about the structure of financial markets. De Cos warned that prolonged Middle East disruptions could pose risks to global financial stability, particularly because rising public debt over the past 15 years has been increasingly intermediated by nonbank financial institutions, including highly leveraged hedge funds. That point extends the fiscal debate beyond inflation. Large sovereign-debt markets have become more deeply connected to leveraged investment strategies, liquidity-sensitive funds and nonbank balance sheets, making abrupt repricing of government bonds a potential source of wider market stress.

Public-debt sustainability has become a recurring theme among international economic institutions. The International Monetary Fund’s April 2026 Fiscal Monitor said global public debt rose to just under 94% of gross domestic product in 2025 and is projected to reach 100% by 2029, one year earlier than previously expected. The IMF attributed the increase largely to major economies and cited spending pressures from social programs, defense, strategic autonomy and interest costs. It also warned that the fiscal consequences of the Middle East conflict could add to those strains.

The BIS warning is therefore part of a broader push by global policy institutions to shift fiscal strategy from emergency support to balance-sheet repair. In the low-rate decade after the global financial crisis, many governments were able to run large deficits at relatively low debt-service cost. That environment has changed. Higher nominal and real interest rates have made public borrowing more expensive, while bond markets have become more sensitive to fiscal plans that appear inconsistent with medium-term debt stabilization.

For finance ministries, the immediate challenge is political as much as economic. A sharp rise in fuel, electricity or food prices can quickly generate pressure for visible relief. Energy subsidies, tax holidays and broad cash transfers can be implemented more quickly than targeted welfare systems, and they often have greater political appeal. But those tools can also be costly, regressive and difficult to withdraw. They may preserve demand for energy at a time when supply is disrupted, thereby diluting the adjustment mechanism that would otherwise limit inflationary pressure.

Targeted fiscal measures are more complex but better aligned with the BIS recommendation. They can include time-limited transfers for low-income households, support for energy-intensive firms facing liquidity rather than solvency problems, and measures that protect essential public services without stimulating broad consumption. The key design features are narrow eligibility, clear expiration dates and funding choices that do not create a permanent increase in structural deficits.

The warning also has implications for investors. Government-bond markets are already balancing several competing forces: expectations for central-bank policy, fiscal issuance needs, geopolitical risk, energy-price volatility and growth uncertainty. If investors conclude that governments will respond to renewed shocks with large borrowing programs, term premiums could rise. Higher long-term yields would feed into mortgage rates, corporate borrowing costs and bank funding conditions, creating a tighter financial backdrop even before central banks take additional action.

The risk is particularly acute where fiscal space is limited. Countries with high debt ratios, large external financing needs or heavy exposure to imported energy may face a more severe trade-off between shielding domestic demand and preserving market confidence. Emerging markets can also be vulnerable if higher global rates support the dollar, tighten external financing conditions or force local central banks to maintain restrictive policy despite weakening growth.

Advanced economies are not immune. Aging populations, defense commitments, industrial-policy programs and climate-transition spending have increased medium-term budget demands. At the same time, higher interest costs are consuming a larger share of government revenue in several major economies. The BIS argument implies that governments should prioritize spending with clear supply-side benefits or social-protection objectives, rather than using fiscal policy to offset every decline in real income caused by external price shocks.

The comments arrive against a fragile market backdrop. Reuters reported that de Cos pointed to buoyant market sentiment driven by optimism over artificial intelligence and expectations of a rapid resolution to the Middle East conflict. He warned that if those assumptions prove wrong, abrupt market corrections could follow. That observation links macroeconomic policy to asset valuations: when markets price in benign outcomes, negative surprises in inflation, energy supply or geopolitics can trigger rapid shifts in risk appetite.

Central banks are likely to read the BIS warning as support for a cautious stance. Even where headline inflation has moderated from the peaks of the post-pandemic period, policymakers remain focused on whether shocks pass through to wages, services prices and medium-term expectations. Fiscal stimulus that sustains demand can make it harder to distinguish between a temporary relative-price shock and a broader inflation process. That uncertainty can bias central banks toward higher-for-longer policy rates or delayed easing.

The BIS position also underscores the importance of policy credibility. If households and businesses believe governments will repeatedly absorb energy shocks through deficit-financed support, they may have less incentive to adjust consumption or pricing behavior. If investors believe fiscal rules will be suspended whenever growth slows, they may demand higher compensation to hold government debt. In both cases, short-term relief can reduce longer-term policy flexibility.

Still, the BIS recommendation does not eliminate the need for public intervention. A severe external shock can create distributional damage that monetary policy is not designed to address. Low-income households spend a larger share of income on energy and food, and small firms may face cash-flow pressure when input costs surge. A purely hands-off fiscal response could intensify inequality, business failures and political instability. The central policy challenge is to provide protection without recreating the demand impulse that contributed to earlier inflation overshoots.

That balance will shape fiscal debates in the months ahead. Governments confronting higher oil prices or supply disruptions may need to show that new measures are temporary, targeted and consistent with medium-term budget plans. Markets will be watching not only the size of any package but also its composition, financing and exit strategy. Measures funded by reallocating existing spending or temporary revenue may be received differently from open-ended borrowing programs.

For central banks, the BIS message reinforces the need to monitor fiscal policy as a key input into inflation forecasts. Monetary authorities can tolerate some short-term inflation volatility if expectations remain anchored. But if fiscal policy adds demand while supply remains constrained, the threshold for action may fall. That is the risk de Cos highlighted: broad fiscal support can transform an external price shock into a more durable inflation problem, requiring higher interest rates and weaker growth to restore stability.

The broader economic outlook now depends on whether governments can resist the temptation to use fiscal policy as a universal shock absorber. The BIS is urging a narrower approach: protect the vulnerable, preserve fiscal space, avoid adding to aggregate demand and keep debt trajectories credible. In an environment of geopolitical uncertainty, elevated public debt and still-sensitive inflation expectations, that guidance is likely to remain a central benchmark for investors and policymakers assessing the next phase of the global economy.