US-Iran war could spike global inflation: IMF
What's the story
The International Monetary Fund (IMF) has warned that the ongoing war between US-Israel and Iran could have a significant impact on global inflation. Kristalina Georgieva, Managing Director of the IMF, said that if oil prices rise by 10% and remain high for most of this year, it would lead to a 40-basis-point increase in global inflation. She advised policymakers to "think of the unthinkable and prepare for it," highlighting the potential economic fallout from this ongoing crisis.
Economic impact
Central banks face tough choices amid escalating crisis
The escalating crisis in the Middle East has complicated the economic strategies of global central banks. The massive supply shock presents a tough choice between supporting growth and fighting inflation. Emerging Asian central banks are particularly wary of cutting interest rates due to the added price pressure from rising fuel costs and potential capital outflows due to deteriorating trade terms with the US.
Monetary policy
Potential impact on Indian economy and currency
The Reserve Bank of India may prioritize supporting growth by keeping interest rates low. However, the US-Iran war could lead to a surge in demand for the dollar, forcing the RBI to intervene more aggressively to stabilize its weakening currency. Other countries like Thailand and Philippines may also have to reconsider their dovish monetary policy stance due to rising fuel costs impacting their economies.
Market reaction
Australian shares take a hit as fears of inflation rise
In Australia, shares have taken a hit with some $90 billion wiped off the value of the ASX. The fall is attributed to a spike in oil prices due to the Middle East conflict, raising fears of a global inflation surge. The benchmark S&P/ASX 200 fell by 2.85%, marking its biggest one-day drop since Donald Trump's "liberation day" tariffs were announced last year.