IRAN CONFLICT FORCES CENTRAL BANKS INTO SHARP POLICY RETHINK

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

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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 US

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 safehaven dollar, which is intensifying from the US-Iran war, may force it to ramp up intervention to prop up its weakening currency.

Thailand and the Philippines may be forced to reverse their dovish monetary policy stance, even as rising fuel costs hurt their economies, said Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute in Tokyo.

"Many central banks will face a tough decision as they come under pressure from both markets and governments," Nishihama said. "With no clear end in sight to the conflict, the risk of stagflation is heightening day by day."

Share markets plunged and the safe-haven US dollar rose in Asia on Monday as oil surged past $110 a barrel, stoking fears of a protracted Middle East war on global energy supplies and higher inflation that may force central banks to hike rates.