The escalating crisis in the Middle East has led to a radical shift in the outlook for global central banks, as a massive supply shock has created a difficult trade-off between supporting growth and combating inflation.
اضافة اعلان
For central banks in emerging Asian economies, cutting interest rates has become a high-risk gamble—not only due to the added pressure on prices caused by rising fuel costs but also because of the risk of driving capital outflows as terms of trade with the United States deteriorate.
For example, sources told Reuters that the Reserve Bank of India (RBI) is expected to focus more on supporting growth by keeping interest rates low. However, a rush toward the US dollar as a safe haven—intensifying due to the war between the US and Iran—may force the bank to ramp up interventions to support its weakening currency.
Toru Nishihama, chief emerging markets analyst at Dai-ichi Life Research Institute in Tokyo, said Thailand and the Philippines might be forced to reverse their accommodative monetary stances, even as high fuel costs weigh on their economies. "Many central banks will face a difficult decision as they come under pressure from both markets and governments," Nishihama said. "With no clear end to the conflict in sight, the risk of stagflation is growing day by day."
Stock markets fell and the dollar surged in Asia on Monday as oil prices surpassed $110 per barrel, sparking fears of a prolonged Middle East war's repercussions on global energy supplies and rising inflation, which may force central banks to raise interest rates.
The trade-off is particularly sharp for manufacturing-reliant economies like South Korea and Japan, given their dependence on global trade, stable markets, and cheap raw material costs—all factors being battered by the deepening Middle East crisis.
Kim Jin-wook, an analyst at Citigroup, noted that the Bank of Korea—which held interest rates steady in February—could adopt a more hawkish stance if inflation remains one percentage point above its target. "At the moment, we still rule out the Bank of Korea raising interest rates in response to higher-than-expected oil prices," Kim said, explaining that government measures to curb fuel prices are limiting the impact of oil price movements on inflation.
"Think the Unthinkable"
Central banks in developed markets, such as the U.S. Federal Reserve, also face the arduous task of balancing growth, inflation, and mounting political pressures.
This dilemma is compounded for the Bank of Japan (BoJ). The Nomura Research Institute suggests that if crude oil prices remain at $110 for a year, it could slash growth by 0.39 percentage points—a severe blow to an economy facing potential weak growth between 0.5% and 1%.
Unlike in the past, when it could pause rate hikes, the BoJ now has less room to overlook price pressures, with inflation having exceeded its 2% target for nearly four years. Analysts say this means the BoJ will have no choice but to reiterate its rhetoric on continuing rate hikes while remaining silent on the timing—a move that could anger a government hostile to rising borrowing costs.
Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), warned on Monday that every 10% rise in oil prices, if sustained for most of the year, would lead to a 40-basis-point increase in global inflation. "We are witnessing a new test of economic resilience in the face of the new conflict in the Middle East," she said during a seminar in Tokyo. "My advice to policymakers in this new global climate is to think the unthinkable and prepare for it." — (Reuters)
