THE interest rate cuts so confidently forecast for large parts of Asia – and elsewhere – just months ago appear to be a diminishing prospect.
That may be the least of the problems that policymakers confront.
Going a step further and hiking borrowing costs is now the tough part, something that should have been off the table.
That course of action is again part of the narrative as energy prices surged after the United States and Israeli assault on Iran and Tehran’s retaliation.
For nations without reserve currencies and a strong desire to preserve their anti-inflation credentials, the case for talking tough is clear.
Doing is another thing.
(Oil prices surged to the highest level since 2022 Monday, before retreating on Tuesday as the White House foreshadowed a quick end to fighting).
Policymakers are also facing a demand shock.
Many of Asia’s major economies are big importers of oil and are dependent on unfettered sea routes for the exports that have powered economic development and remain critical to their growth models.
With the Strait of Hormuz, the narrow waterway that handles around a quarter of the global seaborn oil trade, effectively closed, the region has been dealt a significant blow.
That’s illustrated in the Philippines, which imports nearly all of its oil requirements.
To save costs, Manila put government agencies on a four-day week and instructed departments to curb power use by as much as 20%.
The lights are, quite literally, going out.
Bangladesh restricted the use of the illuminated decorations festooning streets during the holy month of Ramadan.
The textile industry in Pakistan, which uses gas in its dyeing processes and is a vital supplier to stores in the United States and Europe, is in deep trouble.
Fertiliser production that requires natural gas is disrupted in India.
Thai farmers are enduring long lines to stock up on diesel.
The Philippines central bank governor, who just last month lowered rates, said last Friday he’d have to reassess his stance if the price of oil kept escalating.
The authority’s “tolerance range” would be breached if oil exceeded US$100 a barrel (it was trading back below that after it approached US$120 a barrel on Monday).
Should prices stay elevated, policymakers face an invidious choice.
The expansion has decelerated sharply and would be jeopardised by rate hikes.
The economy is in what he described on Bloomberg Television as a “vicious circle” where “a lack of confidence affects growth and low growth affects confidence”.
The Philippines certainly isn’t the global economy. But the dramatic prescriptions that might be countenanced resonate.
India, which imports almost all its oil, the bulk of which comes from Persian Gulf countries, may also be forced into a premature tightening.
The Reserve Bank of India only recently brought its easing cycle to an end; investors had envisaged a period of stability.
Even economies that have been doing well are now sounding somewhat defensive.
Malaysia, where growth surged last year courtesy of the global tech boom, is holding off on a boost to its 2026 growth forecast of 4% to 4.5%.
Lifting rates in these circumstances won’t do anything to alter the underlying cause of the inflationary scare.
It’s got almost nothing to do with domestic economies in Asia, but the result of events beyond their borders.
That doesn’t make dealing with it easier. Nor is the pressure unique to Asia.
Traders have placed bets on the European Central Bank hiking this year and the Bank of England delaying its next reduction, at the very least.
Wagers on reductions from the Federal Reserve this year have been scaled back.
The war presents an unwelcome third point of tension for central banks.
In the past 12 months, officials have wrestled with whether tariffs imposed by US President Donald Trump are a one-timeshock that can be managed or more disruptive, leading to a sustained boost in inflation.
That appears to have been almost resolved: The global economy – and trade – kept expanding, and price gains weren’t so rapid that they quashed rate cuts.
Then came the debate about consequences of the rapid advances in artificial technology.
Now comes the impact of the Middle East war.
Do policymakers look through the rise in oil and focus instead on underlying drivers of growth and inflation?
This is what they prefer to do. But it would require them to judge that the conflict, raging for less than two weeks, will be short-lived.
Trump has sent conflicting signals on its possible duration.
Asia’s strongest performers began 2026 on a resounding note. Singapore, home one of the world’s busiest ports, easily topped growth forecasts while Vietnam powered ahead by more than 8%.
Will the dramatic escalation in oil prices bring all this undone? It depends, as central bank chiefs like to say.
Not just on fortitude, but some luck. Rate hikes are a less-than-perfect response; they are very blunt instruments.
If officials can just hold out a little longer, they might catch a break.
Absent that, they know what they have to do. — Bloomberg
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.
