Iran conflict forces Asian central banks into sharp policy rethink

Asian central banks face tough choices on interest rates amid rising oil prices and the escalating Iran conflict, impacting growth and inflation.

The escalating ​crisis in West Asia has dramatically changed the outlook for Asian central banks, with the huge supply shock posing a difficult trade-off between underpinning growth and ‌countering inflation.

For emerging Asian central banks, cutting interest rates has become a risky bet not just because of ​the added price pressure from higher fuel costs, but the risk of triggering capital outflows through worsening terms of trade ⁠with the U.S.

The Reserve Bank of India, for one, expects to focus more on supporting growth by keeping interest rates low, sources have told Reuters. But a rush towards the safe-haven dollar, which is intensifying from the U.S.-Iran war, may force it to ramp up intervention to prop up its weakening currency.

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“We ‌don’t see a possibility of a near-term rate hike in India — we do not see retail fuel prices moving higher immediately,” said Suvodeep Rakshit, economist at Mumbai-based Kotak Institutional Equities.

“At this stage, the immediate priority of the central bank will be what ‌happens on FX. We expect them to continue intervening to curb volatility there. An afterthought will be the liquidity impact of that ‌intervention ⁠and they will infuse liquidity as needed.”