The ghost of stagflation is once again walking the global economy. For a central bank, a recession usually invites rate cuts. The opposite risk also exists: if the Fed is too patient and inflation expectations become unanchored, it will later have to tighten more and for longer. The Bank of England articulated this dilemma with particular precision. But at the same time, it acknowledged that the central bank is trapped between opposite risks: more inflation from energy and more weakness in employment and demand. The logic makes sense. But a rate that is too low can end up validating an inflationary surge if the central bank loses credibility. They operate in living economies, full of lags, measurement errors, broken supply chains, and expectations that change at speed. A central bank does not decide between good and evil. On March 19, it left its rate at 3.75 percent and, in its minutes, avoided falling into the simplistic hawkish or dovish stance: it admitted that monetary policy cannot influence global energy prices, but must prevent the adjustment from leading to second-order effects on wages and other prices. The IMF warned of this in its latest World Economic Outlook: all roads lead to higher prices and lower growth. The decision was controversial because it came shortly after annual inflation for the first half of March rose to 4.63 percent, well above the variability range. At the same time, it recognized that rising energy costs would weaken activity. The ECB, which also kept its rates on March 19, added concrete numbers to the distress: its new projections raised general eurozone inflation for 2026 to 2.6 percent, with underlying inflation at 2.3 percent. And yet, Governor Christine Lagarde indicated that the cycle of cuts is nearing its end. The signal was not one of careless relaxation, but of fine calibration in a weak economy. Was it the right decision? Christine Lagarde and her colleagues know that the formal mandate is price stability, but in practice, they cannot ignore an environment of weakened growth. Even the Bank of Japan—the economy that for decades symbolized insufficient inflation—debates how to coexist with a more expensive world: at its March meeting, one committee member proposed raising rates faster due to the risk of second-order effects. Moments when the manual stays in the drawer and what matters is judgment. This is what is happening today. The war in the Middle East has once again put the worst type of macroeconomic shock on the table: one that pushes prices up while simultaneously weakening activity. Raising rates in response to a supply shock can help prevent second-order effects—energy price hikes from passing on to wages and other prices—but it cannot lower the price of crude oil. New inflationary pressure, on the other hand, suggests tightening the screws. The problem arises when both signals arrive at the same time. The manual is no longer enough. Today the uncomfortable world of supply has returned: energy, wars, geopolitics, fragmented chains. Here, the central banker is no longer a surgeon with a precise scalpel. They are more like a pilot in thick fog, forced to decide with imperfect instruments and the certainty that any mistake will have costs. Read the latest version of Businessweek México here. One must decide which risk is more dangerous: falling short on inflation or overdoing it and pushing the economy into a deeper downturn. What makes this juncture unique is that this dilemma has overflowed the old debate between hawks and doves, and even the distinction between single and dual mandates. A higher rate does not produce natural gas, it does not open the Strait of Hormuz, and it does not lower food prices by decree. It chooses between different costs, distributed unevenly over time. That is why the discussion that sometimes arises in Mexico seems so poor. But mandates do not operate in a vacuum. The craft consists precisely in discerning when a shock must be viewed in the long term and when it threatens to contaminate the general price formation process. In this context, one must read the decision of the Bank of Mexico. The answers will begin to take shape in the coming months: in whether medium-term inflation expectations remain anchored, in whether the output gap continues to widen, and in whether the next INPC readings show that the supply shock is not contaminating underlying inflation. Those who see the decision as an automatic betrayal of the price stability mandate oversimplify. So do those who celebrate it as if inflation were already tamed. In the end, that is the great task of central banks in 2026: not to feign omnipotence, but to exercise prudence under uncertainty. For years, monetary policy was accustomed to fighting demand shocks, where the logic was cleaner. There are moments when a central bank's task ceases to resemble an exact science and approaches more of an art. The easy answer would be: to fulfill its mandate and that's it. They speak of the interest rate as if it were a universal key. What should a central bank do when facing incompatible evils? On March 18, it left the federal funds rate unchanged in a range of 3.50 to 3.75 percent. Brazil adds another lesson from the other side: despite being an oil exporter and having more cushions than many importers, its central bank also opted for caution. Faced with a supply shock, all central banks end up doing the same thing: wait, calibrate, and admit that their instruments were not designed for this type of disruption. The US Federal Reserve was explicit on this matter. Jerome Powell was clear: the Fed can afford to wait before reacting to the oil shock precisely because the monetary authority does not produce oil and cannot fix a geopolitical disruption with a rate move. We still do not know, and it is wise to be honest about it. On March 26, it reduced its target rate by 25 basis points to 6.75 percent in a divided 3-2 vote. Even external protection has limits when the global environment deteriorates. All this returns to the center a discussion that seemed resolved. It is not.
