Mideast Conflict Halts Asian Rate Cuts

In 2022, central banks across Asia responded to rising inflation with rate hikes. Now, with the Middle East conflict sending energy prices soaring, policymakers are largely holding steady.

Central bankers in Japan, Indonesia, and Taiwan opted to stay on the sidelines, mirroring decisions in the U.S., Canada, the U.K., and Europe. Australia was the notable exception, raising rates due to pre-existing high inflation.

Ipek Ozkardeskaya at Swissquote concluded that the Middle East conflict is intensifying, and the appropriate monetary policy response remains unclear. Stefan Angrick at Moody's Analytics emphasized that rate hikes cannot resolve supply-driven energy shocks.

Governments across Asia are currently employing fiscal measures like fuel subsidies and price caps to mitigate consumer impact. Maybank analysts now expect central banks in the Philippines and Singapore to tighten policy settings, with other major ASEAN economies remaining on hold through the year.

Economists Chua Han Teng and Radhika Rao at DBS warn that a concurrent surge in food prices alongside energy costs poses a significant risk for Southeast Asia. The Bank of Japan is carefully monitoring oil prices for underlying inflation risks, firming expectations of a summer rate hike.

Bank Indonesia's governor stated the Middle East war eliminated the possibility of a rate cut, prioritizing rupiah stability. Chandresh Jain at BNP Paribas indicated Bank Indonesia could tighten policy if the rupiah weakens significantly or inflation expectations surge.

Taiwan's policymakers have already raised inflation forecasts for the year, benefiting from strong growth and restrictive rates. Jain of BNP Paribas concluded that global central banks are willing to hike rates if the Middle East crisis drives up inflation, with policy dependent on the shock's duration and intensity.