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

The widening conflict in the Middle East poses a new test for global central banks, as fears of an oil shock and renewed inflation risks complicate policymakers’ calculations for supporting growth.

Crude oil prices rose on Monday After the United States and Israel launched strikes on Iran over the weekend, killing Iranian Supreme Leader Ali Hosseini Khamenei. Tehran responded with missile attacks targeting several Gulf countries.

The movement of oil tankers through the Strait of Hormuz, the most important corridor for oil shipments in the world, was halted due to the threat of attacks from Iran. Preventing ships from crossing Waterway.

Brent crude Prices extended four days of gains, rising 1.6% to $82.76 a barrel on Wednesday, hovering near the highest level since January 2025. United States West Texas Intermediate Crude oil prices also rose for the third day to $75.48.

Higher energy prices would ultimately affect consumer and producer prices, especially oil prices Highly dependent economies On oil imports in the Middle East, making central banks scramble to reassess the path of interest rates.

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

European Central Bank Council Member Pierre Funche He said this week Officials will avoid reacting hastily to any movements in energy prices. “If this continues longer, if the increase in energy prices is higher, we will have to run our models and see what happens,” Funch said.

Former Treasury Secretary Janet Yellen said the conflict could affect US economic growth and fuel inflationary pressures, hindering the Federal Reserve from cutting interest rates.

“The recent situation in Iran puts the Fed more on hold and more reluctant to cut interest rates than it was before this happened,” Yellen said on Monday.

The inflation rate in the United States 2.4% in JanuaryHigher than the Fed’s target of 2%. Yellen warned that tariffs imposed by President Donald Trump could push annual inflation lower at least 3%.

The latest escalation comes after Trump seized oil-rich Venezuela earlier this year and threatened to seize Greenland, another strategically important energy reserve.

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

The global energy market is grappling with Worst case scenarioWith prolonged disruption in the strait potentially pushing Brent crude prices above $100 per barrel and European natural gas prices beyond €60 ($70.17) per megawatt hour, according to Bank of America.

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

Assuming a six-week closure of the Strait of Hormuz and oil prices rising from $70 to $85 per barrel, regional inflation in Asia could rise by about 0.7 percentage points, according to Goldman Sachs. The Philippines and Thailand are expected to be most at risk, while China could see a “more modest increase.”

The continued rise in oil prices may prompt Asian central banks such as the Philippines and Indonesia to pause interest rate cuts, while policymakers in India and South Korea are likely to keep interest rates steady for longer, said Michael Wan, senior currency strategist at MUFG Bank.

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

“For a 10% oil shock, the inflation addition is small enough that most people would likely look at it. [But] The calculation changes materially at increases of $20-$30 per barrel, where headline CPI exerts double or triple effects and second-round effects become harder to ignore, the research firm said.

He added that raising interest rates is still largely off the table at the moment, unless oil prices continue to rise and extend to food and other basic commodities as a result of rising transportation and shipping costs, leading to higher core inflation.

Nomura expects Malaysia – which it described as a “relative beneficiary” as a net energy exporter – as well as Australia and Singapore, to tighten interest rates. The bank also lowered its expectations for an interest rate hike by the Central Bank of the Philippines.

“The rise in oil prices increases our conviction for a rate hike from Bank Negara Malaysia [and] “There is a risk that the Bangko Sentral ng Pilipinas will remain on hold — versus the previous baseline of another 25 basis point cut in April,” Nomura said.

The bank expects a modest impact of 0.01 percentage point from higher oil prices on GDP growth in Singapore.

Both Indonesia and Singapore said on Monday they were closely monitoring financial markets. Bank Indonesia said it would move 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 local economy and financial system.

The subsidies could add new pressure to governments’ already large fiscal deficits, Rob Subbaraman, head of global macro research at Nomura Bank, said on a CNBC program. “Squawk Asia Fund” Tuesday.

“So, which ‘negative’ do you want to get: higher inflation or a worse fiscal situation? These are the policy choices that governments have to make.”