"Iranflation" is disrupting Asian central banks and risks driving up energy inflation.
Conflict in the Middle East and the closure of the Strait of Hormuz are driving up global energy prices, sparking renewed inflation concerns in Asia. Central banks face a difficult challenge in controlling prices or supporting the economy.
On March 9, 2569 at 04.00:XNUMX p.m., Nikkei Asia reported that The escalating conflict in the Middle East is complicating the monetary policy decisions of central banks in Asia. Soaring energy prices have reignited inflation concerns, following a period of more accommodative financial environments in several regions. This comes after the easing of Donald Trump's tax measures in 2568 and a slowdown in inflationary pressures, leading many central banks to anticipate a slowdown in interest rate cuts or maintaining rates unchanged in 2569. However, the recent surge in oil prices has created uncertainty surrounding this outlook.
This challenge may be particularly evident in the case of the Bank of Japan, which is currently in a cycle of raising interest rates, making Japan different from many countries in the region. While raising interest rates may help control inflation, it risks suppressing economic growth.
Takeshi Yamaguchi, Chief Economist for Japan at Morgan Stanley MUFG Securities. He indicated that the Bank of Japan is likely to adopt a more cautious stance, reducing the likelihood of short-term interest rate hikes. He warned that the Japanese economy could face a "stagflation-like" situation in the short term, as rising oil prices driven by geopolitical factors will push inflation through higher import prices, while real household income will decline, weakening private consumption.
If tensions in the Middle East persist, the likelihood of the Bank of Japan raising interest rates in June, which is the baseline scenario for analysts, could be further delayed.
Oil and gas prices surged last week after Iran retaliated against attacks by the United States and Israel by shutting down the crucial Strait of Hormuz, a shipping route that carries approximately 30% of the world's oil trade. Data from the energy data analytics company Kpler. specify that Nearly 90% of the oil that passed through this strait in January was shipped to Asian countries.
The disruption to energy supply caused the price of Brent crude, the world's benchmark, to rise nearly 30%, reaching around $93 per barrel. Goldman Sachs also raised its second-quarter Brent crude price forecast by $10, estimating an average price of around $76 per barrel, and projected a fourth-quarter 2569 price of approximately $66 per barrel, $6 higher than its previous forecast.
However, the bank warned that the severity and duration of the conflict with Iran remain uncertain. If the situation escalates and oil prices surge further, it could have a significant impact on the global economy and financial markets.
In recent times, Asian stock markets, such as those in Japan and South Korea, have faced volatility, while regional currencies have been pressured to weaken amid the ongoing conflict. Donald Trump stated via social media that negotiations with Iran can only take place if Iran surrenders unconditionally.
however Homayoun Falakshahi, Head of Crude Oil Analysis at Kpler. expected The conflict may remain confined to a narrow area and end in the short term, causing oil prices to fall once geopolitical risks ease.
However, in the short term, the risks remain high, with Brent crude prices potentially surpassing $100 per barrel if the situation escalates, such as prolonged disruptions to shipping in the Strait of Hormuz or attacks on the region's energy infrastructure. In the worst-case scenario, if shipping is blocked for more than four weeks, oil prices could surge to $150 per barrel.
The Bank of Japan is scheduled to hold its next monetary policy meeting on March 18-19. Data from Totan Research and Totan ICAP indicates that the probability of Japan raising interest rates in April is around 59%. Governor of the Bank of Japan Kazuo Ueda specify that The central bank will continue to raise interest rates if the economy performs as expected, but warned that rising energy costs could have a significant impact on the global and Japanese economies.
In other Asian countries, the central banks of the Philippines and Thailand recently cut interest rates, while the central bank of Malaysia chose to keep rates unchanged, citing increased uncertainty in the Middle East and heightened downside risks.
David Rolley, Fixed Income Portfolio Manager at Loomis Sayles, a subsidiary of Natixis Investment Managers. specify that The prolonged surge in oil and gas prices constitutes a supply shock, a situation that central banks find difficult to handle because interest rates can control demand but cannot solve the supply problem.
He said that if inflation is not high in the initial stages, most central banks tend to ignore the temporary price effects and maintain their monetary policy. However, if domestic inflation remains high, the central bank may need to raise interest rates to maintain currency stability.
Prior to the conflict with Iran, many central banks in Asia, such as those of Japan, South Korea, Singapore, and the Philippines, tended towards tighter monetary policies due to strong regional trade growth, expanding technology sectors, and persistent inflationary pressures.
Lloyd Chan, Senior Currency Analyst at MUFG Global Markets Research. specify that South Korea and Taiwan could be particularly affected, as both countries rely heavily on natural gas for electricity generation. The risk of energy-related inflation could force their central banks to adopt more cautious monetary policies.
This situation is similar to the Russo-Ukraine war, which occurred during a time when the global economy was facing inflationary pressures from supply chain problems in the post-COVID-19 pandemic. Ataru Okumura, Senior Interest Rate Strategist at SMBC Nikko Securities. specify that The war caused oil prices to rise and accelerated inflation, forcing central banks around the world to raise interest rates rapidly.
Meanwhile, global bond markets also faced volatility as investors continued to debate whether central banks should raise interest rates to control inflation or cut them to support economic growth in the coming period.
refer : asia.nikkei.com
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