The escalating conflict in the Middle East is significantly reshaping the policy outlook for Asian central banks. The surge in energy prices and supply disruptions are creating a difficult balance between supporting economic growth and controlling rising inflation.
For many emerging Asian economies, cutting interest rates has become increasingly risky. Higher oil prices are already adding to inflationary pressures, while weaker trade balances with the United States could trigger capital outflows if monetary policy becomes too loose.
India’s central bank, the Reserve Bank of India (RBI), is expected to focus on supporting economic growth by maintaining relatively low interest rates, according to sources cited by Reuters. However, the strengthening U.S. dollar — fueled by the ongoing U.S.-Iran conflict — may force the RBI to increase currency market interventions to stabilize the Indian rupee.
Suvodeep Rakshit, an economist at Mumbai-based Kotak Institutional Equities, said there is little expectation of an immediate interest rate hike in India because retail fuel prices are unlikely to rise sharply in the near term. Instead, the central bank’s main concern will likely be maintaining stability in the foreign exchange market.
Rakshit added that the RBI is expected to continue intervening to limit volatility in the rupee. Any liquidity effects resulting from these interventions could later be managed through adjustments in domestic liquidity conditions.
Other Asian economies may face more difficult decisions. According to Toru Nishihama, chief emerging markets economist at Dai-ichi Life Research Institute in Tokyo, countries such as Thailand and the Philippines could be forced to reconsider their accommodative monetary policy stance even as higher fuel costs weigh on economic activity.
Nishihama warned that policymakers are facing increasing pressure from both financial markets and governments. With the Middle East conflict showing no clear signs of ending, the risk of stagflation — a combination of slow growth and high inflation — is rising steadily.
Financial markets across Asia have already reacted to the crisis. Stock markets declined while the U.S. dollar strengthened as oil prices surged above $110 per barrel. The energy shock has raised concerns that global inflation could accelerate, potentially forcing central banks to tighten monetary policy.
Manufacturing-driven economies such as South Korea and Japan face particular challenges. These countries rely heavily on global trade, stable financial markets, and affordable raw materials — all of which are being disrupted by the widening Middle East conflict.
South Korea’s central bank, which left interest rates unchanged in February, could adopt a more hawkish stance if inflation continues to remain above its target level, according to Citigroup economist Kim Jin-wook.
However, Kim noted that the Bank of Korea is unlikely to raise interest rates immediately in response to higher oil prices, especially as government measures to control fuel costs could help limit inflationary pressures.
The policy dilemma is also affecting advanced economies. Major central banks, including the U.S. Federal Reserve, must balance slowing economic growth with rising inflation and increasing political pressure.
Japan faces a particularly difficult situation. According to estimates from the Nomura Research Institute, if oil prices remain around $110 per barrel for a year, Japan’s economic growth could decline by about 0.39 percentage points. This would be a significant impact for an economy that typically grows at only around 0.5% to 1% annually.
Unlike previous periods, the Bank of Japan now has less flexibility to delay interest rate hikes because inflation has remained above its 2% target for nearly four years. As a result, the central bank may need to continue signaling further tightening while avoiding precise guidance on the timing of future rate increases.
Australia and New Zealand are also facing policy challenges due to rising oil prices. In Australia, sustained increases in energy costs could push inflation expectations higher, according to Jonathan Kearns, chief economist at Challenger and a former official at the Reserve Bank of Australia.
If inflation expectations become entrenched, the Reserve Bank of Australia may be forced to keep interest rates elevated for a longer period in order to bring inflation back under control.
New Zealand’s situation is different. The economy has struggled to recover from the impact of previous interest rate hikes, leaving policymakers with limited room to tighten policy further.
Jarrod Kerr, chief economist at Kiwibank, said the Reserve Bank of New Zealand may have to tolerate slightly higher inflation in the short term in order to avoid tightening monetary policy while global growth is slowing.
The International Monetary Fund has also warned about the broader impact of rising oil prices. IMF Managing Director Kristalina Georgieva said that a sustained 10% increase in oil prices could push global inflation higher by about 40 basis points.
Speaking at a symposium in Tokyo, Georgieva said the new Middle East conflict is once again testing the resilience of the global economy. She urged policymakers to prepare for extreme scenarios in an increasingly uncertain geopolitical environment.
