Middle East conflict puts central banks on edge as oil shock fears mount

Fears of an oil shock and renewed inflation risks complicate policymakers’ calculations of supporting growth, while the growing conflict in the Middle East has posed a new test for global central banks.

Crude oil prices rose Monday after the United States and Israel launched an attack on Iran over the weekend, killing Iran’s religious leader Ali Hosseini Khamenei. Tehran responded with missile attacks targeting several Gulf countries.

Tanker traffic in the Strait of Hormuz, the world’s most critical transit point for oil shipments, has virtually stopped due to the threat of attack from Iran. prevented ships from passing waterway

Brent crude oil prices continued their four-day rise, rising 1.6% to $82.76 per barrel and hovering near their highest level since January 2025. USA West Texas Central Crude oil prices also rose to $75.48 on the third day.

Higher energy prices will ultimately be reflected in consumer and producer prices, especially for economies heavily dependent on Middle Eastern oil imports, causing central banks to seek to re-evaluate the path of interest rates.

“The ongoing Iran conflict solidifies the case for many central banks to keep interest rates steady for now,” a team of economists at Nomura wrote in a note on Sunday. he said.

ECB council member Pierre Wunsch he said this week Authorities will avoid hasty reactions to any movement in energy prices.

“If it takes longer, if the increase in energy prices is higher, we’ll have to run our models and see what happens,” Wunsch said. he said.

Former Treasury Secretary Janet Yellen said the dispute could deal a blow to US economic growth and fuel inflationary pressures, preventing the Federal Reserve from cutting interest rates.

“The latest situation in Iran is making the Fed even more on hold and more reluctant to cut rates than before it happened,” Yellen said Monday. he said.

US inflation was 2.4% in January, above the Fed’s 2% target. Yellen warned that President Donald Trump’s taxes could push annual inflation to at least 3 percent.

The latest flare-up follows Trump’s takeover of oil-rich Venezuela earlier this year and his threat to seize control of Greenland, another strategically important energy reserve.

Brent crude oil is up 36% so far this year, while WTI futures are up 32% as of Wednesday, according to LSEG data.

The global energy market is grappling with a worst-case scenario, with a prolonged disruption in the Bosphorus potentially pushing Brent oil prices above $100 a barrel and European natural gas prices breaking 60 euros ($70.17) per megawatt hour, according to Bank of America.

Asian economies will be particularly exposed. Most of the crude oil coming through the Strait of Hormuz goes to China, India, Japan and South Korea. US Energy Information Administration.

According to Goldman Sachs, under the assumption that the Strait of Hormuz will be closed for six weeks and oil prices will rise from $70 to $85 per barrel, regional inflation in Asia may increase by approximately 0.7 percentage points. While the Philippines and Thailand are expected to be the most vulnerable countries, it is stated that China may see a “more modest increase”.

Michael Wan, senior foreign exchange analyst at MUFG Bank, said sustained increases in oil prices could lead Asian central banks such as the Philippines and Indonesia to halt interest rate cuts, while policymakers in India and South Korea will likely keep interest rates steady for longer.

BMI, a unit of Fitch Solutions, estimates the conflict will add 7 to 27 basis points to headline consumer inflation across Asia, with the sharpest impact in Thailand, South Korea and Singapore due to the higher weight of energy in inflation calculations.

“The inflation increase for a 10 percent oil shock is small enough for most people to consider it. [But] The research firm noted that the calculation changes significantly with increases of $20-$30 per barrel, where headline CPI doubles or triples the impact and second-round effects become harder to ignore.

The report stated that if rising oil prices continue and high transportation and freight costs do not cause an increase in core inflation by being reflected in food and other commodities, interest rate increases will largely remain off the table for now.

Nomura expects Australia and Singapore to tighten interest rates, as well as Malaysia, which it describes as a “relative beneficiary” as a net energy exporter. The bank also lowered its expectations for a rate hike by the Philippine central bank.

“The increase in oil prices increases our belief in Bank Negara Malaysia’s interest rate increase” [and] “There is a risk that the Bangko Sentral ng Pilipinas will remain on hold compared to a 25 basis point rate cut in April,” Nomura said.

The bank expects higher oil prices to have a modest impact of 0.01 percentage points on Singapore’s GDP growth.

Indonesia and Singapore said on Monday they were monitoring financial markets closely. Bank Indonesia said it would take action to keep the rupiah in line with economic fundamentals, while the Monetary Authority of Singapore said it was assessing the impact of the conflict on the domestic economy and financial system.

Fiscal stimulus and subsidies could ease some of the inflationary impact and relatively moderate price pressures as we head into 2026, providing a relatively comfortable starting point.

“We expect Asia to use fiscal policy as the first line of defense to protect consumers,” Nomura economists wrote. he said. Possible measures include price controls, higher subsidies, fuel excise tax cuts and lower import tariffs on crude oil and refined products.

Rob Subbaraman, Nomura’s head of global macro research, told CNBC that subsidies could put a new burden on governments’ already tight fiscal budget deficits. “Squawk Box Asia” Tuesday.