According to the latest outlook report released by the Asian Development Bank (ADB) on Wednesday, ongoing wars in Europe and the Middle East, coupled with a severe El Nino weather pattern, are intensifying price pressures across Asia. This combination could sustain inflationary momentum into next year, keeping regional central banks on high alert.
The ADB report highlights that the renewed escalation of hostilities in Iran and the spillover of conflict into Yemen have disrupted the supply of crude oil and refined products, while Russia's war against Ukraine continues to obstruct grain transport. Simultaneously, abnormal weather conditions triggered by El Nino are threatening crop harvests from India to Thailand, reducing hydropower generation, and even restricting traffic through key waterways such as the Panama Canal.
Albert Park, Chief Economist at the ADB, stated in the report: "Risks remain tilted to the downside. Further escalation of conflicts or a stronger-than-expected impact from El Nino could both suppress economic growth and push inflation higher."
The ADB projects an inflation rate of 4.2% for developing economies in the Asia-Pacific region this year and 3.5% next year, both markedly higher than the 3% forecast for 2025. The bank also revised its growth forecast for the region down to 5% for 2026, easing from 5.5%, alongside upward revisions of its average oil price projections to $90 per barrel for this year and $78 for next year.
Although widespread subsidy measures have helped cushion the blow for consumers this year, the ADB noted that persistently elevated energy costs have begun to impact various national economies. The effect is likely to be most pronounced in countries where food constitutes a large share of household consumption, such as those in South Asia.
If inflation proves sticky, the ADB indicated that economies including Bangladesh, India, Indonesia, Pakistan, the Philippines, and Vietnam may still have room to tighten monetary policy further this year. Should inflationary pressures subside, policymakers could begin considering interest rate cuts by 2027.
"Overall, policy rates are expected to gradually return to levels seen before the escalation of Middle East conflicts, but the pace and magnitude of easing will depend on the evolution of inflation, growth, and external risks," the ADB concluded.
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