The odds of central banks across Asia and beyond taking a more hawkish stance appears to be rising the longer the conflict in the Middle East drags on.
On Thursday, oil rose back above $100 a barrel as a planned release of strategic reserves by the International Energy Agency did little to quell fears about supply disruptions as the fighting continues.
While it is uncertain how long the turbulence will last, some analysts are tempering expectations of monetary easing.
Economists at Goldman Sachs have pushed back their forecasts for the Federal Reserve, now expecting rate cuts in September and December, rather than in June and September. Elevated oil prices have contributed to a higher near-term inflation outlook, reducing the likelihood of earlier easing, GS said in a note.
For Asia, which relies heavily on the Middle East for energy, the shock could be particularly inflationary.
Fiscal policy is likely be the first line of defense but sustained high oil prices could drive a hawkish monetary policy pivot across the region, economists at JPMorgan said in a report.
Under a scenario where energy costs push consumer prices higher, the economists see a stronger likelihood of central banks in Singapore and Malaysia tightening policy settings, and a lower chance of rate cuts in Indonesia and the Philippines.
The Reserve Bank of India meanwhile, could remain on hold for longer as inflation risks build, JPM said.
For the Bank of Japan, soaring energy costs avoid the awkward situation of having to defend further rate hikes at a time when headline inflation is below the 2% target, said Capital Economics’ Marcel Thieliant.
Provided that crude prices don’t rise much further, inflation is unlikely to reach levels the BOJ would find intolerable, he said in a note. Still, the BOJ will likely worry about the economic impact of the conflict, Thieliant said, flagging the risk that Japan will run out of energy as 95% of its crude oil is imported from the Middle East.
In Australia, another 25-basis-point rate hike this month seems increasingly likely as the Middle East conflict sharpens the urgency to act, said Sunny Kim Nguyen at Moody’s Analytics.
The case for tightening was clear before the conflict and now the threat of an oil shock raises new inflationary risks, she wrote in a note.
Write to Jihye Lee at jihye.lee@wsj.com and Amanda Lee at amanda.lee@wsj.com