Asian Central Banks Shift to Sidelines as Mideast Conflict Drags On

By Jihye Lee and Fabiana Negrin Ochoa

In 2022, central banks across Asia met a rise in inflation with rate hikes. As the Middle East conflict sends energy prices soaring, markets are watching to see how policymakers will respond this time around.

A week of policy decisions saw most banks hold fire as they expressed alarm about the economic threat posed by the war in the Middle East.

Central bankers in Japan, Indonesia and Taiwan opted to stay on the sidelines, as did their counterparts in the U.S., Canada, the U.K. and Europe. The notable exception was Australia, where policymakers narrowly voted to raise rates–an expected decision as inflation was already running too hot for comfort even before the energy price shock hit.

For Ipek Ozkardeskaya at Swissquote, the decision-packed week wrapped up with one clear conclusion: “the Middle East conflict is intensifying, and no one knows what the right monetary policy response should be.”

While policymakers can take lessons from the past, conditions are different this time around. Rates across much of Asia are still relatively high even after last year’s cuts, consumer demand is fragile and growth is soft.

There is also not much a rate hike can do to blunt the impact of a supply-driven shock.

Central banks can’t just raise rates and clear the way for energy to flow through the Strait of Hormuz again, said Stefan Angrick at Moody’s Analytics.

For now, fiscal policy is shouldering some of the weight, with governments across Asia resorting to measures like fuel subsidies and price caps to soften the blow to consumers.

Still, if the fighting continues, some central banks may be forced to tighten the policy screws. What seems increasingly likely is that rate cuts are off the table.

“The energy price shock has short-circuited the monetary easing cycle,” said analysts Maybank.

They now expect central banks in the Philippines and Singapore to tighten policy settings, with other major economies in the Asean bloc likely to remain on hold through the year.

Economists at DBS warn that a concurrent surge in food prices alongside energy costs would pose a significant risk for Southeast Asia, echoing the synchronized, commodity-driven inflation spike observed in 2022.

“A resurgence of inflation threats would see regional central banks vigilant against broadening price pressures and second-round price effects, even as monetary policy is unable to fully alleviate supply-driven price shocks,” DBS’s Chua Han Teng and Radhika Rao wrote in a note.

A heightened tone of alarm was visible in the statements delivered by central banks this week.

The Bank of Japan said it is carefully monitoring the risk that oil prices may accelerate underlying inflation, firming expectations of a summer rate hike. Hotter inflation could bring that timeline forward, said Angrick at Moody’s Analytics.

In Indonesia, the central bank’s governor said the impact of the Middle East war is why it was no longer conveying possibility of a rate cut. Bank Indonesia’s priority is keeping the rupiah stable, a tough task as flight-to-safety trading buoys the dollar and weighs on emerging-market currencies. If the rupiah comes under significant pressure or inflation expectations surge, it could tighten policy settings, said Chandresh Jain at BNP Paribas.

Policymakers in Taiwan have already raised inflation forecasts for the year, the island has more room to breathe, thanks to blockbuster growth last year and the fact that it has kept rates more restrictive than most of its peers.

All told, global central banks have shown a willingness to hike rates in if the Middle East crisis drives up inflation, said Jain of BNP Paribas. But the path for monetary policy will depend on the duration and intensity of the shock, he said.

Write to Jihye Lee at jihye.lee@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com

(END) Dow Jones Newswires

March 20, 2026 06:51 ET (10:51 GMT)

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