Iran Conflict Puts Oil Shock Back on Asian Central Banks' Radar

By Fabiana Negrin Ochoa and Kimberley Kao

Renewed conflict in the Middle East poses a fresh headache for Asia's central banks, reviving inflation risks just as price pressures had steadied across much of the region.

Crude prices soared Monday after the U.S. and Israel launched strikes on Iran over the weekend, putting the risk of an oil shock back on the table. Tehran's retaliation has hit at least nine other countries, raising the threat of a wider, longer-lasting conflict.

For central banks, the jump in oil prices brings back painful memories of 2022, when the war in Ukraine sent commodity prices surging, fueling inflation and prompting aggressive rate hikes.

If hostilities disrupt energy shipments through the Strait of Hormuz, the consequences for Asia's could be severe. About 20% of the world's daily oil supply passes through the waterway linking the Persian Gulf to global markets.

"Asia is particularly exposed as it buys the lion's share of oil and gas produced in the region," Moody's Analytics economists said.

Most of the crude that transits through the Strait goes to countries like China, India and South Korea, they noted.

Advanced economies such as Japan, Singapore and Hong Kong, which import most of their energy and food, are especially vulnerable and would feel price swings immediately, said Stefan Angrick at Moody's Analytics.

If higher commodity prices feed into consumer and producer inflation, central banks may have to pause rate cuts or even consider rate hikes.

"Monetary policy easing bias will be put to the test," OCBC economists Selina Ling and Lavanya Venkateswaran said.

Still, subsidies could cushion the inflation impact, they said, and relatively benign price pressures in 2025 provide a more comfortable starting point for 2026.

Fiscal buffers vary across countries, however, and rate hikes may be politically difficult in economies grappling with weak consumption and rising living costs.

An upward price spiral could weigh on currencies too.

If commodity prices rise and a country's import bills swell, trade balances would deteriorate, and that tends to hurt currencies, noted Angrick.

Most Asian currencies weakened against the dollar early Monday, particularly those of net oil importers.

Reignited global inflation would worsen the terms of trade for Asia's oil importers, said MUFG's Lloyd Chan, who expects an oil shock to trigger broad regional weakness--notably for the won, rupee, peso and baht, which are more sensitive to energy import costs.

Though it is too early to tell how long the conflict will last, central banks are on alert.

Indonesia and Singapore both said Monday they are closely monitoring financial markets.

Bank Indonesia said it will step in as needed to keep the rupiah in line with economic fundamentals, and will remain active through interventions, an official said in a statement.

The Monetary Authority of Singapore said it is assessing the conflict's impact on the domestic economy and financial system.

Trade officials warned that, if prolonged, higher energy prices could drive up costs for businesses and consumers and weigh on the global and Singapore economies.

For now, MAS said the Singapore dollar nominal effective exchange rate--its policy tool it uses in place of interest rates--will continue to "dampen imported inflationary pressures."

OCBC economists said if import costs aren't contained, Singapore could tighten monetary policy sooner rather than later.

Ultimately, the impact on Asia will depend on how long the conflict lasts.

An oil shock layered on top of uncertainty over U.S. tariffs further complicates the policy outlook.

This is happening in the context of a string of geopolitical shocks in recent years, including the disruptions to shipping along the Red Sea, which has never really recovered, said Angrick.

"There's literally something new every week, which scrambles the calculus," he said.

-- Ying Xian Wong contributed to this report

Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com and Kimberley Kao at kimberley.kao@wsj.com

(END) Dow Jones Newswires

March 02, 2026 05:48 ET (10:48 GMT)