Zero Equilibrium® Monetary Policy Watch: Geopolitical Tensions Force Emerging and Frontier Banks Into A Policy Dilemma.

- By Chinedu Okoye 

Introductory Note:

The Iran–Israel war (from late February 2026) has shattered market calm. Oil prices spiked (oil breached $110/barrel, driving a global risk-off mood.

Investors rushed to cash and near cash assets with money-market funds (near cash) seeing record inflows and safe-haven flows to the US dollar (cash), while stock and bond markets tumble. 

In Asia, MSCI’s emerging-market equity index plunged about 6% in the past week. This sent foreign capital fleeing EM assets, raising currency volatility and deepening the central-bank dilemma: cut rates to support growth, or hold/raise to defend currencies and tame inflation. 

Emerging-market equities saw heavy losses in early March 2026. Equity funds focused on South Asia and Latin America were among the worst performers as the Iran–Israel conflict intensifies.

The effect of the middle eastern conflict on markets and possible effects on Central Bank decisions is reviewed below, in light of prior  monetary policy action by emerging and frontier market central banks covered by Zero Equilibrium Economics, earlier in the year. 

Middle East Conflict and Market Reaction:

The Middle East supply shock forced a sharp policy rethink. Global investors flipped to cash, as stocks, gold and sovereign bonds took hits as crude oil prices soar. For EM central banks, higher oil means imported inflation, but cutting rates risks a capital exodus to the safety of US assets.

The IMF warned a 10% oil rise could add +40 bp to global inflation, and global policymakers have been urged to “think of the unthinkable” in this new risk environment. Oil prices gas risen in about 90% since the begining of the conflict. This has been accompanied by market volatility as

share indices plunged across regions.

Consequently, investors slashed EM bets, with emerging-market equity funds enduring outsized outflows (e.g. funds for Pakistan, Chile, etc.), far worse than developed-market funds.

EM currencies like the Indian rupee and Korean won weakened in early March. A development has forced central banks to weigh contradictory pressures of rising import costs and fragile growth.

Asian Emerging Markets Central Bank Dilemma: Supporting Growth or Guarding Stability?

Asian central banks (India, ASEAN, East Asia) have split on this dilemma. Many entered 2026 with easing bias to bolster growth, then paused or reversed after the Middle East shock. Key policy rate decisions since early 2026 include:

- Reserve Bank of India (RBI): The RBI which cut rates though 2025 to support growth as inflation cooler, taking the Repo Rate from 6.50% to 5.25%, (a 125bps cut in 2025), paused it's easing cycle in early February keeping the Repo Rate unchanged at 5.25%. This is as the Bank hoped to maintain a neutral policy stance to assess the impact of the earlier cuts. 

With inflation staying within target range and a much more improved growth outlook, the central bank wanted to observe the transmission of prior cuts before easing any further. However, that window for additional easing may now be narrowing. The recent sharp spike in global oil prices has revived inflationary concerns, complicating the RBI’s policy calculus and potentially limiting the scope for further accommodation in the near term.

- People's Bank of China (PBOC): China’s central bank left benchmark loan rates unchanged in February for the 9th straight month as government authorities rolled out fiscal stimulus instead and cut some targeted rates, signalling that they have room to ease later.

Growth is slowing (with 2026 GDP projections at 4.5%), but Beijing has not responded to war risk by tightening, instead, it relies on fiscal measures to bolster domestic deman. The PBOC has immense easing capacity (i.e., room to trim RRR and policy rates), but has not acted immediately on higher oil or safe-haven flows.

- Indonesia (BI):  Bank Indonesia kept its key rate at 4.75% on Feb 19, citing a still-weak rupiah despite consistent rate cuts in 2025 (cumulative -150 bp). Governor Perry Warjiyo noted the rupiah is “undervalued relative to fundamentals” and that currency stability must come first before further easin.

BI expects growth of about 5% (Q4 2025 growth was 5.11%) and inflation around 3-4%, but the Bank has clearly stated and implied a preference for defending the rupiah over cutting again in the near term. The central bank said it would “resume easing once currency pressures abate”. These pressures may now be well excaracebated by rising oil prices.

- Bank of Thailand (BOT): On Feb 26, the Bank of Thailand surprised markets with a 25 bp cut to 1.00%, its sixth since Oct 2024, citing sub-potential growth and strong currency (baht) appreciation (up +9% in 2025) as reasons for the rate cut. 

Governor Vitai made not of domestic slack, urging monetary stimulus to lift growth to a desired 2.7% (along with fiscal policy), and the cut was the first since a series of prior cuts, aimed squarely at reviving growth amid U.S. tariff uncertainty and a robust export sector.

The room for further easing may still exist given the currency strength, but may well need to tightened policy if the war lingers and energy prices bite producers and consumers alike.

- Bank Negara Malaysia (BNM): Bank Negara Malaysia has kept the Overnight Policy Rate on hold for four meetings into March 2026. BNM’s statement emphasized Malaysia’s position of strength, as 2025 GDP grew 5.2%, with inflation staying moderate, with healthy external balances .

The bank explicitly said policy is “appropriate and supportive” and noted the war’s impact on Malaysia should be contained by strong fundamentals. Zero Equilibrium expect no moves throughout 2026, as  Malaysia’s economy is relatively sheltered (being a net energy exporter) and can weather higher oil and tariffs.

- Philippines (BSP): Made a surprise cut of 25bps in February (to 4.25%), the BSP indicated willingness for further easing. Governor Remolona said the door remains open to “further rate cuts to support growth,” since inflation is low at around the 2% and growth slowed to 3.0% in Q4 2025.

The BSP has reduced rates by 200 bp since August 2024 and is likely done as long as inflation stays near the 2-4% target. The emphasis is clearly on bolstering recovery in a fragile environment, even as global risks rise.

- Taiwan (CBC): In late January, Taiwan’s central bank held rates steady at 2%, unchanged since March 2024. The CBC upgraded GDP forecasts on booming tech exports (AI chip demand), but cautioned on possible FX volatility. However it signaled it is readiness to manage exchange-rate swings in line with it's stability is mandate, essentially prioritizing macro stability even with comfortable growth. Taiwan thus stays on hold, trusting reserves and interventions over rate cuts.

- South Korea (BoK): The BoK left its policy rate unchanged in February, which is of no surprise ad South Korea’s economy is sensitive to oil and trade shocks. ZE analysts expect the BoK to adopt a hawkish tilt if inflation stays above target by 1 ppt or more, but for now the BoK is on hold pending clearer signs of inflation persistence.

Other Emerging and Frontier Economies:

Outside Asia, emerging and frontier central banks have also favored growth-friendly policy, where inflation has eased:

- Nigeria (CBN) – Cut to 26.50%. On Feb 24, Nigeria’s central bank trimmed its Monetary Policy Rate by 50 bp, the fourth cut in a row, bringing the MPR to 26.50%. Inflation which was 15.1% in January is on a downward path, and growth is expected ~4.5% in 2026. The CBN noted that the disinflation trend continues, and it has scope to ease policy to support activity. 

Governor Cardoso observed that past tightening had started to transmit but reiterated that the economy needed both fiscal and monetary policy support.

- Ghana (BoG):  Ghana’s central bank cut rates by 250 basis points  to 15.50% in January 2026, its fourth cut since mid-2025. This aggressive easing comes from the rapid disinflation (from 54% in Dec 2022 to 5.4% in Dec 2025.

Ghana's improved macro conditions (tight policy earlier, fiscal reform, reserves build-up) allowed the cut and helped anchor inflation near target. GDP growth is expected to remain strong at about 6% in 2026. Insulated somewhat by Gold, analysts foresee more cuts this year, prior to the war. However, inflation resurfacing due to prolonged high energy prices could see the Bank either pause or reverse course and hike.

- Central Bank of Kenya (CBK): On Feb 10, the CBK made its 10th straight cut, lowering the base rate to 8.75%. Kenya’s inflation is mild and within target (4.4% in January,) and growth is solid at over 5%.

The bank explicitly said it would “do all it can” to drive faster growt. The decision was aimed at boosting lending in the private sector. With inflation under control and external finances stable, Kenya, like Ghana, seems to be prioritizing growth over currency defense.

- Brazil (Copom): Brazil’s Copom on Jan 28 held the Selic rate at 15%, but signaled the easing cycle is imminent. Inflation has come under the 4.5% ceiling with data suggesting a cooling economy. Policymakers stressed “serenity” on the pace of cuts, explicitly pointing to the possibilities of an easing turn starting in March.

This was a distinctly dovish shift from mid-2025, and the bank made clear all options are on the table. However with the advent of the geopolitical crisis in the middle east and possible effects on EM assets, it is doubtful that Copcom continues to easing plan at all, it at the pace it initially planned, however the market consensus is for an initial 25–50 bp cut in March 2026.

- South Africa Reserve Bank (SARB): In late January, SARB’s MPC voted to hold key rates at 6.75%, wary of electricity tariffs and trade tensions. The decision was split (4-2) per SARB's release, as some members wanted cuts to boost anemic growth (of a 2026 forecast at mild +1.4%).

However, the majority said they needed more disinflation in expectations and feared global jitters. This was a difficult, but well-informed the trade-off in hindsight, as despite weak GDP, SARB chose price stability (especially as inflation peaked 5.5% in Dec) over immediate rate relief.

Developed Markets: Holding and Treading Carefully:

Major developed central banks have generally maintained an on-hold stance amid the Middle East uncertainty. The Developed Market central banks are in a holding.mode, with inflationary concerns from the ear and it's Effect in c jdenoil prices weighing-in on policy makers decision on interest rate policy.

- US Federal Reserve:  Held at 3.75% in late January 2026, as Fed officials signaled more patience. Fed Governor Hammock said policy is “in a good position” and likely to stay unchanged “for some time” given that inflation remains above target.

She noted that the Iran war (and resulting oil spike) presents potential inflation risks: she noted the conflict “has driven up energy prices and fears of inflation gains”. Thus the Fed is not rushing to cut.

- European Central Bank: The ECB are in no rush to hike as policymakers stress data dependence. President Lagarde and Governing Council members do not see any reason why they should raise rates” immediatey.

Latvian Kazaks explicitly urged the ECB to “sit tight” for now. The Eurozone Bank expects the war to have ambiguous effects: higher energy costs could raise inflation, but growth might slow. With the direction and impact unclear, thenconsensus is to keep policy unchanged at 4.5% (refinancing rate) until clearer signs emerge.

- Bank of Japan: Gradual hikes are expected [at the ZE Camp] to continue, after the BOJ raised rates to 0.75% in Dec 2025 which marked its first rate increase in decades. The Bank has signaled further tightening with Governor Ueda reiterated that the BOJ's  commitment to raise interest rates if the economy and prices move in line” with forecasts. 

He warned the Middle East conflict adds uncertainty: higher oil could depress growth (hurting inflation), or stoke inflation expectations. Analysts note the BOJ might delay a March hike due to volatility, but overall the BOJ remains the most hawkish major bank, committed to hitting its 2% inflation target.

- Bank of England: The BoE has held at 3.75% since Dec 2025. The BoE’s next move is highly uncertain. Member Alan Taylor (voting for cuts in December) said it’s “too soon to tell” the war’s impact 

Markets have scaled back rate-cut bets (from nearly two cuts priced in to now <1). Taylor warned Britain may soon enter “deficient demand” territory where growth slumps despite rising inflation pressure. For now, the BoE has signaled caution: the economy is slowing and inflation may be harder to forecast, suggesting any cuts will wait.

- RBA & RBNZ:  The RBA raised rates in Feb 2026 to 3.85%, and Governor Bullock said data support that move. She noted Middle East events add uncertainty: they were a reminder of how quickly things can change. Nonetheless, Australia left the door open to further hikes if needed to tame inflation.

New Zealand’s Reserve Bank (new Governor Breman) held its OCR at 2.25% in February, describing policy as accommodative for some time until a sustained recovery emerges. Both Australian and the New Zealand Reserve Banks (ANZ) remain data-dependent, but the RBA is more hawkish (fighting still-elevated inflation) while the RBNZ stays dovish as it undergoes a fragile recovery.  

ZE Remarks: Summary and Policy Implications

In sum, the Iran–Israel war has intensified the classic EM policy dilemma. According to Reuters analysis, “cutting interest rates has become a risky bet” for Asia EM central banks, since higher oil and dollar flows threaten inflation and currencies.

Going into the war, most Asian EM central banks were poised to ease (to boost weak growth anf/or absorb shocks from global headwinds). However they have largely paused on easing plans or held policy rates, only Philippines and Thailand had cut rates so far this year. 

Still, the prevailing sentiments for Asian EM is that rate cuts are risky bets at the moment, not just cause of higher energy costs but from the risk of triggering capital outflows. Despite growth concerns, to guard against inflation and FX volatiliy, many EM Asian central banks tilting towards a more hawkish stance than originally expected by the markets and by ZE earlier in the year.

As a result, many have chosen to pause or reverse easing. Still, the pressure to foster growth remains: Malaysia’s BNM highlighted “robust domestic growth” as a buffer, and Indonesia forecasts 5%+ GDP.

Frontier/emerging markets with high inflation (Nigeria, Ghana, Kenya) have been cutting aggressively as inflation normalizes while those with stubborn inflation (Brazil, South Africa) are cautious or holding. However these Banks may be made to pause further easing plans if headline inflation picks up from the increased energy costs and associated market disruption.

Investors are now demanding higher yields for risk. Since the conflict began, EM currencies like the rupee and real weakened, and CDS spreads widened. For example, global investors pulled $2.7 billion from EM bond funds by early March. 

The IMF’s Georgieva warned of 40 bp added global inflation from oil rise. Central banks, both EM and developed, are watching data closely; many have emphasized patience and readiness to adjust policy as needed. 

Conclusion: The current bias is that supporting growth has generally taken precedence in EM, but with a cautious eye on inflation and FX. Central bankers stress that easing is still “on the table” where possible (e.g. Philippines, Nigeria, Ghana). Others (India, Indonesia, Brazil, South Africa) are more hesitant, citing external risks. 

Developed economies have largely held rates steady, recognizing the upside inflation risk from oil but also the growth drag. Moving forward, Zero Equilibrium expects DM central banks to stay highly data-driven. 

The next few meetings in Q2 2026 will reveal whether the global interest-rate cycle resumes easing (as many EM hope) or whether central banks remain on guard against a new inflation surge. These devision are ultimately dependent on how the war affects global oil markets and overall trade.