The escalating conflict between Iran, the United States and Israel has upended the playbook for Asia’s central banks, confronting them with an ugly trade‑off between supporting fragile recoveries and containing a fresh burst of inflation driven by soaring oil prices and a surging dollar. Benchmark Brent crude has jumped past US$110 a barrel on fears of prolonged supply disruption from the Gulf, while investors have piled into US assets as a haven, pushing Asian currencies lower and complicating any move to cut interest rates.
For many emerging Asian economies, cheaper money had looked tempting at the start of the year as growth cooled and headline inflation retreated from 2022’s peaks. Now, that window is closing fast. Economists at Nomura and other houses warn that if oil were to stay around US$110 for a full year, it could shave roughly 0.4 percentage points off regional growth while adding 40 basis points to inflation. The IMF has flagged the Middle East shock as a key upside risk to its global inflation forecasts, stressing that fuel price spikes tend to ripple quickly into food and transport costs.
Central banks are responding in different ways depending on their exposures and politics. The Reserve Bank of India is leaning toward keeping rates on hold for longer, with officials signalling that growth support will remain a priority but that aggressive cuts are off the table as long as oil and the dollar stay elevated. At the same time, the RBI has stepped up foreign‑exchange intervention to smooth rupee volatility, drawing on comfortable reserves but mindful that excessive defence could invite speculative attacks.
Elsewhere in emerging Asia, the calculus is shifting from dovish to neutral or even hawkish. Thailand and the Philippines, which are both large net fuel importers with limited fiscal space, may be forced to reverse earlier hints at rate cuts, even as higher petrol prices squeeze consumers and tourism‑led recoveries remain incomplete. Their central banks fear that letting inflation expectations drift higher could trigger capital outflows and sharper currency slides, especially if the US Federal Reserve keeps rates restrictive for longer.
More advanced economies face their own dilemmas. The Bank of Korea is under pressure to consider a more hawkish stance if headline and core inflation stay above target, despite softening exports and a housing downturn. In Japan, where the Bank of Japan has only just begun edging away from ultra‑low rates, the combination of higher import bills and a weaker yen further complicates any shift toward policy normalisation. Too rapid a tightening would risk derailing the fragile real‑wage gains that Tokyo is desperate to entrench.
Across the region, one common response has been to lean more heavily on FX intervention and macroprudential tools rather than interest‑rate moves alone. Officials are supplying dollar liquidity to banks, loosening some collateral rules, and in a few cases tweaking fuel subsidies or tax policies to cushion households from the immediate impact of higher pump prices. But those cushions are costly and, if prolonged, can undermine fiscal positions that are only just recovering from the pandemic.
The longer the Iran crisis drags on, the harder the choices become. Central banks know that tightening too much risks stalling growth and worsening debt burdens; doing too little risks inflation spikes, weaker currencies and abrupt capital outflows. For now, most are signalling patience and data dependence rather than dramatic shifts. Yet behind the scenes, they are redrawing their risk scenarios around an energy shock and a more volatile geopolitics, a reminder that monetary policy in Asia is increasingly being set as much in the Strait of Hormuz as in Washington or Beijing.
