Middle East crisis may stop monetary easing in ASPAC

MANILA, Philippines — The worsening of the geopolitical tensions in the Middle East can put a stop to monetary policy easing in the Asia-Pacific as many countries in Asia are vulnerable to the impact of higher oil import prices on retail inflation, according to market intelligence firm IHS Markit.

In the special focus section of its Week Ahead report, IHS Markit said the current policy easing direction of banks in the region was driven by lower inflationary pressures assisted by declining world oil prices.

These included the Bank Indonesia, Bank Negara Malaysia, Bank of Thailand, Bangko Sentral ng Pilipinas (BSP), Bank of Korea, the Reserve Bank of India and the Reserve Bank of Australia.

“If world oil prices rise sharply due to a further escalation in the Middle East crisis, many Asian nations would also be vulnerable to the impact of higher oil import prices on retail inflation,” the report said.

“If inflation pressures are pushed higher in some heavily oil-dependent Asian economies due to rising world oil prices, this could remove scope for further monetary easing by some Asia-Pacific central banks,” it said.

IHS Markit said that other than the prevailing pressure on oil prices, global prices of inputs have already shown early signs of an upturn in late 2019, feeding through to higher prices charged for goods and services.

As such, this year a rise in oil prices as well as the rebound in iron ore will be important drivers in the rise in input prices.

Asian industry sectors are said to be heavily exposed to any significant rise in world oil prices.

These would include transportation-related industries, especially aviation, road haulage, shipping and logistics.

Other industry subsectors that stand to be affected include petrochemicals and plastics.

“The agricultural sector in many developing countries would also be adversely impacted due to the higher costs for petrol and diesel for tractors and irrigation pumps,” IHS Markit said.

Any sharp rise in world oil prices would also be expected to result in international investors shifting their asset allocation towards traditional safe haven assets such as gold, US treasuries, US dollar and Japanese yen, and away from growth assets such as Asian emerging markets’ equities and currencies, the report said.

The BSP has so far downplayed the inflationary pressure emanating from geopolitical tensions in Iran.

BSP Governor Benjamin Diokno said recently that oil prices would have to surge to $90 per barrel to impact the government’s inflation forecast of two up to four percent for the year and affect the monetary policy easing campaign.

On Friday, Socioeconomic Planning Secretary Ernesto Pernia said the further escalation of the tensions in the Middle East would indeed become a huge inflationary risk for the Philippines.

“Yes, if the conflict escalates. It seems to be thawing, though, with President Trump saying he’ll not respond to Iran’s bombing of the green zone in Iraq,” he said.