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How will central banks respond to rising oil prices?

The recent jump in oil prices poses a significant upside risk to our inflation and interest rate forecasts for this year. Central banks would normally “look through” a one-off jump in the price level and try and cushion the blow to real incomes by keeping interest rates low. But with inflation already above target in around half the countries we cover, the risks are tilted towards earlier tightening. We already expect rate hikes this year in Korea, India and Indonesia. We think Taiwan, where price pressures are rising and GDP is well above its pre-pandemic trend, would also tighten if oil prices remained elevated for a long period. In contrast, central banks in South East Asia are more likely to keep rates on hold. Not only is inflation less of a worry, but economic recoveries are also less advanced. We should start to learn more about how policymakers will respond to the crisis on Thursday, when Bank Negara Malaysia has a scheduled meeting.

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