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Against the backdrop of brewing Middle East tensions, ASEAN-6 and India’s central banks confront a familiar but intensified policy dilemma: how to respond to externally driven energy inflation without derailing domestic growth. Regional central banks loosened policy levers in 2024-2025 after tightening rates soon after the pandemic as price pressures rose on the back of post-Covid recovery, pent-up demand, fiscal stimulus, and supply-side shortages. With the recent energy shock, the inflation management agenda needs to be balanced with other monitorables, including extent of energy dependence, currency pressures, domestic financial conditions, and potential growth risks.
Monetary policy is a relatively blunt instrument to address supply-side price pressures, although this assumes importance if inflationary expectations face the risk of being unanchored or currency depreciation triggers rate-sensitive capital outflows, thereby necessitating a policy response. To this end, the sequence of policy tightening risks amongst the ASEAN central banks will be dictated by the risk or scale of a pass through of higher oil & gas prices to domestic prices or risks of any cut in subsidies or fuel price increases, which will carry first and second order impact to price stability. In this respect, Singapore’s MAS set the ball rolling on Tuesday by becoming the first in the region to adopt a measured tightening, slightly increasing the slope of the SGD NEER policy band to curb rising imported inflation, and anchor inflation expectations (see Singapore: Steeper SGD policy band slope for inflation defence).
The narrative across the rest of the region is considerably more differentiated, with the tightening sequence likely to play out as follows: a) Hawkish camp – should energy prices remain elevated, the Philippines and Vietnam are expected to lead the tightening cycle. The Philippines faces a potential stagflationary shock this year, with growth witnessing a weak handover from last year, while inflation comes off a low base, and peso remains under pressure. Still a modest scale of rate increase is still a possibility with the year if price risks prevail; b) Middle ground - Indonesia and Malaysia are in this camp. Risks of an increase in retail fuel prices and resultant impact on inflation will be an important determinant of a shift in BI’s and BNM’s policy outlook. c) Gradualists – Thailand and India are unlikely to exhibit urgency in tightening policy. While Thailand will likely experience higher inflation that returns to the central bank’s 1-3% target in 2026, policymakers face a dilemma as higher fuel costs also supress a fragile economy by biting into consumption and firms’ margins amid weak credit conditions. India undertook administrative action to put brakes on rupee’s one-way depreciation, while raising inflation and lowering growth prospects modestly at the recent policy review (RBI: Neutral pause). Add to this are indications from local weather agencies that the summer rainfall could be below normal, raising the spectre of hurt to crop production.
Overall, the first line of response will be fiscal policy – delivering targeted and well-structured support to limit price pass-through, ease supply constraints, and sustain consumption through transfers, subject to available fiscal space. Monetary policy would follow if second-round effects begin to materialise, particularly to contain broader inflation pressures and safeguard currency stability (Hawkish hold on policy, second order risks to food).
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