The escalating crisis in the Middle East has dramatically changed the outlook for global central banks, with the huge supply shock posing a ​difficult trade-off between underpinning growth and countering inflation.

For emerging Asian central banks, cutting interest rates has become a risky bet not just because of the ‌added price pressure from higher fuel costs, but the risk of triggering capital outflows through worsening terms of trade with the US

The Reserve Bank of India, for one, expects to focus more on supporting growth by keeping interest rates low, sources have told Reuters. But a rush towards the safe-haven dollar, which is intensifying from the US-Iran war, may force it to ramp up intervention to prop up its weakening currency.

Thailand and the ​Philippines may be forced to reverse their dovish monetary policy stance, even as rising fuel costs hurt their economies, said Toru Nishihama, chief emerging market economist at Dai-ichi ​Life Research Institute in Tokyo.

“Many central banks will face a tough decision as they come under pressure from both markets and governments,” Nishihama ⁠said. “With no clear end in sight to the conflict, the risk of stagflation is heightening day by day.”

Share markets plunged and the safe-haven US dollar rose in Asia on Monday ​as oil surged past $110 a barrel, stoking fears of a protracted Middle East war on global energy supplies and higher inflation that may force central banks to hike rates.

The trade-off is ​particularly acute for manufacturing-heavy economies like South Korea and Japan, which are dependent on global trade, stable markets and cheap raw material costs - all being undermined by the widening Middle East crisis.

South Korea’s central bank, which kept rates steady in February, could take a more hawkish stance if inflation persistently stays a percentage point above its target, said Citigroup economist Kim Jin-wook.

“For now, we continue to believe BoK is unlikely to ​hike policy rate in response to a higher-than-expected oil price,” with government steps to curb fuel prices limiting the pass through of oil moves on inflation, Kim said.

‘Think of the Unthinkable’

Developed market central banks, such as the Federal Reserve, also face a tricky act balancing growth, inflation and increasing political pressure.

The dilemma runs deep for the Bank of Japan. If crude oil prices stay at $110 for ‌a year, that ⁠could knock 0.39 of a percentage point off growth, according to Nomura Research Institute, a huge blow to an economy with subdued potential growth of around 0.5% to 1%.

But unlike in the past when it could afford to pause rate hikes, the BOJ has less room now to look through price pressures with inflation having exceeded its 2% target for nearly four years.

That means the BOJ will have little choice but to repeat its mantra of continued rate hikes, while staying mum on the timing of such a move that could draw the ire ​of an administration hostile to higher borrowing ​costs, analysts say.

Australia and New Zealand are ⁠typical of how economies in different cycles put policymakers in a difficult bind.

Sustained oil price hikes risk de-anchoring price expectations in Australia, where inflation is already elevated, said Jonathan Kearns, chief economist at Challenger who is also a former Reserve Bank of Australia official.

“If inflation expectations increase, ​which they obviously could in this period where we’ve had high inflation, that will mean that the Reserve Bank would need to ​have interest rates higher ⁠for longer in order to bring inflation back down.”

New Zealand faces a different challenge as the economy has struggled to recover from the hit from past rate hikes.

“We suspect central banks, and the RBNZ in particular, may well have to tolerate higher inflation in the short run to avoid tightening into a slowing global economy,” said Jarrod Kerr, chief economist at Kiwibank.

International Monetary Fund Managing Director ⁠Kristalina Georgieva ​said on Monday a 10% rise in oil prices, if persistent through most of the year, would result in ​a 40-basis-point increase in global inflation.

“We are seeing resilience tested again by the new conflict in the Middle East,” Georgieva said in a symposium in Tokyo. “My advice to policymakers in this new global environment is think of the unthinkable ​and prepare for it.”