Energy shockwave quietly sweeps across Asia; Asian central banks may be forced to turn hawkish.

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The ongoing escalation of the Middle East conflict has caused oil prices to return to the $100 mark, sharply increasing the monetary policy pressure faced by central banks across Asia.

J.P. Morgan economists stated in a report that fiscal policy may be the first line of defense for countries facing energy shocks; if oil prices remain high, it could drive central banks across Asia to turn more hawkish. As energy costs push up consumer prices, the likelihood of Singapore and Malaysia tightening policy rises, while the chances of rate cuts in Indonesia and the Philippines correspondingly decrease.

On Thursday, international oil prices broke through $100 per barrel again, and the International Energy Agency's plan to release strategic reserves failed to effectively calm concerns over supply disruptions in the market.

Goldman Sachs has postponed its forecast for U.S. Federal Reserve interest rate cuts from June and September to September and December, citing high oil prices pushing up the near-term inflation outlook, thereby reducing the probability of early easing. For Asia, which is highly dependent on Middle Eastern energy, the inflationary impact of this shock could be particularly pronounced.

From Japan to Australia, the Pressure on Central Banks Varies

This round of Middle East conflict was triggered on February 28 by a U.S.-Israeli attack on Iran, continuously disrupting global oil supply and weakening production capacity. The impact on each country’s central bank varies significantly depending on their circumstances.

For the Reserve Bank of India, J.P. Morgan says that with inflation risk accumulating, it may keep rates unchanged for a longer period of time.

Japan’s central bank is in a relatively unique position. Capital Economics analyst Marcel Thieliant points out that surges in energy costs have actually spared the Bank of Japan from an awkward situation—previously, it was quite difficult to justify further rate hikes when overall inflation was below the 2% target, but the rise in oil prices provides some support.

He said that as long as crude oil prices do not rise much further, inflation is unlikely to reach levels the Bank of Japan cannot tolerate. However, Thieliant also warned that Japan relies on the Middle East for 95% of its crude oil imports, so risks of energy supply disruptions cannot be ignored, and the Bank of Japan will remain highly vigilant regarding the economic impact of the conflict.

In Australia, Moody’s analyst Sunny Kim Nguyen said that the probability of another 25 basis point rate hike this month is rising, and the Middle East conflict has increased the urgency to act. She wrote in her report that the case for tightening policy was already established before the conflict broke out, and now the threat of an oil price shock brings new inflation risks.

Currently, there is still considerable uncertainty as to how long this period of turbulence will last, but some analysts have begun to lower their expectations for monetary easing. As the conflict drags on, the probability of central banks across Asia turning hawkish continues to rise over time.

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