Oil prices still offer relief for Asia, but no policy pivot
Per the full note source, oil prices below recent highs have somewhat alleviated inflationary and external pressures in Asia, yet central banks are unlikely to pivot towards an easing of policies. The commentary emphasizes that while net importers like India and the Philippines see some relief, persistent inflation and prior price shocks will constrain monetary policies moving forward. As a result, tight monetary conditions are expected to prevail, particularly in regions like South Korea and Japan, where additional tightening remains plausible amidst high inflation metrics.
What the desk is arguing
The desk asserts that despite lower oil prices providing temporary relief for Asian economies, significant inflationary pressures are likely to persist, restricting the scope for any policy pivot. The takeaway from the source is that central banks will maintain a tightening bias until there's clearer evidence of moderating inflation.
Specifically, the desk notes the expectation that Brent crude will average around $80/bbl in Q3, which, while beneficial, will not resolve the persistent inflation above target ranges—particularly in the Philippines, where inflation is expected to stay above the Bangko Sentral ng Pilipinas' target of 2-4%. This reinforces a tightening stance for many central banks across Asia.
The alternative read would be that should inflation ease sooner than expected, a reconsideration of tightening strategies could emerge, but the current data doesn't support that view.
Key takeaways
- 01Oil prices below peaks provide marginal relief for net importing Asian economies.
- 02Inflationary pressures remain high, limiting the possibility of a central bank policy pivot.
- 03Central banks in South Korea and Japan likely to maintain their tightening paths.
- 04Brent crude expected to average around $80/bbl in Q3, impacting domestic price stability.
Market implications
Traders should watch inflation metrics and central bank communications closely, particularly from the Bangko Sentral ng Pilipinas. A key level to monitor would be core inflation trends in the Philippines, which if persistently elevated, could influence policy decisions significantly.
Risks to this view
A sudden drop in inflation readings could prompt regional central banks to reconsider their tightening stance, leading to a potential reevaluation of monetary policy across the board. Additionally, unexpected geopolitical events affecting oil supply could disrupt the current price trajectory.
Articles Oil prices still offer relief for Asia, but no policy pivot Published 11:04 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download With oil prices still below their recent peaks, inflationary and external pressures across Asia have eased somewhat. But second-order inflation effects and FX vulnerabilities remain key constraints. Central banks are likely to maintain a tightening bias until price pressures and external balances improve Deepali Bhargava While lower oil prices have supported net importers such as India, the Philippines and Indonesia, they are unlikely to drive a sustained recovery on their own Inflationary pressures continue to build, limiting scope for policy pivot We are broadly maintaining our rates and FX views even though oil prices are off their earlier peaks.
While Asia stands to benefit significantly from lower fuel costs, central banks are unlikely to take further tightening off the table until there is clearer evidence that both food and core inflation are moderating. In our view, policymakers in the Philippines, Indonesia, South Korea and Japan remain on course to continue tightening as expected. India and Thailand may have some scope to delay rate hikes at the margin, though not to abandon them altogether.
We now expect Brent crude oil to average around US$80/bbl in 3Q. Lower energy prices should provide some relief for economies such as the Philippines, where fuel subsidies have been relatively limited and domestic pump prices have adjusted more directly to movements in global oil markets. However, inflation is likely to remain well above the Bangko Sentral ng Pilipinas' (BSP's) 2-4% target range for the remainder of the year, as spillover effects from previous increases in oil prices keep food and core inflation higher-for-longer.
As a result, a more sustained and meaningful moderation in CPI inflation would be required for the BSP to reconsider the additional 50bp of rate hikes that we currently have pencilled in for the rest of 2026. Indonesia's central bank continues to face challenges in stabilising the rupiah despite its recent rate increases. Limited visibility on the policy mix – including the fiscal strategy, the sovereign rating trajectory, and the broader growth agenda – continues to weigh on sentiment.
Hence, currency pressures remain elevated, suggesting that monetary policy will need to stay focused on external stability as well as inflation containment. Meanwhile, there are growing signs that inflationary pressures are broadening in both Japan and Korea. In Japan, the Tankan survey pointed to rising input costs and strengthening pricing power among firms, suggesting that the pass-through of higher costs to final prices is becoming more entrenched, especially with the Japanese yen at multi-year lows.
In Korea, both food and core inflation moved higher in June, reinforcing the view that underlying price pressures remain firm despite some easing in global commodity prices. Together, these developments support our expectation that both the Bank of Japan and the Bank of Korea will continue normalising policy. Asian currencies need more than oil-led support Asian currencies have come under pressure again after a brief relief rally.
While lower oil prices have supported net importers such as India, the Philippines and Indonesia, they are unlikely to drive a sustained recovery on their own, particularly amid a strong US dollar environment. A more durable rebound will require stronger domestic fundamentals and steadier capital inflows. The Indian rupee (INR) and Indonesian rupiah (IDR) have both recovered modestly, helped by improved foreign demand for local bonds.
India boosted investor attractiveness by removing capital gains tax and withholding tax on interest from government securities, while Indonesia has benefited from higher local yields. However, lasting currency gains will depend on lower energy import costs being complemented by stronger capital-account buffers and more persistent foreign inflows. We remain relatively constructive on INR, which is supported by recent Reserve Bank of India measures aimed at narrowing the balance-of-payments gap.
By contrast, concerns over Indonesia’s policy direction could continue to weigh on sentiment, leaving IDR vulnerable to underperforming regional peers. Overall, until there is clearer evidence of stronger capital-account dynamics, FX fragility is likely to remain a constraint. This, in turn, could limit how quickly regional central banks are able to shift away from a tight policy stance. 3 things to watch in the second half of the year The evolution and intensity of El Niño, alongside lingering spillover effects from higher oil prices into services inflation, will be key to watch.
A severe weather shock could disrupt agricultural output, lift food prices, and reignite inflationary pressures across Southeast Asia. Combined with sticky services inflation, this could complicate the disinflation process from potentially lower oil prices. A key question is whether the tech-led growth outperformance in Korea, Malaysia, Singapore and Taiwan can broaden into a recovery in domestic consumption.
A more balanced growth mix would make Asia’s growth trajectory more sustainable. How the rapid expansion of AI-driven investment is reshaping FDI patterns across Asia. Economies positioned to attract AI-related manufacturing, data infrastructure, and technology investments are likely to see stronger capital inflows and create conditions that are more conducive to local currency appreciation.
Asia economy Asia Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Deepali Bhargava Regional Head of Research, Asia-Pacific Deepali Bhargava joined ING in 2024 and is Head of Research and Chief Economist Asia-Pacific.
She has over 19 years of work experience as a macro specialist covering rates, FX and equity markets… In this article Inflationary pressures continue to build, limiting scope for policy pivot Asian currencies need more than oil-led support 3 things to watch in the second half of the year
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