Iran War Forces Asian Central Banks Into Painful Choice Between Growth and Inflation

Oil surging past $110 a barrel has dramatically shifted the outlook for Asian central banks, which now face a painful trade-off between supporting growth and fighting inflation. The Bank of Japan faces particular pressure, as crude oil staying at $110 for a full year could shave 0.39 of a percentage point off growth, a heavy blow for an economy with potential growth of only 0.5% to 1%. Japan's inflation has already exceeded its 2% target for nearly four years. India's central bank plans to keep rates low to support growth but may be forced to intervene heavily to defend its weakening currency, while South Korea could turn more aggressive on rates if inflation stays a full percentage point above target. The IMF warned Monday that a 10% rise in oil prices, if sustained through most of the year, would increase global inflation by 40 basis points. Thailand, the Philippines, Australia, and New Zealand all face mounting pressure to reconsider their current policy directions.