An upside shock to oil prices is likely to cause a rise in inflation across Asia as South Asia is highly vulnerable to Red Sea disruptions, research firm BMI said in a report.

India would experience the largest inflation increase by 1.3 percentage points, followed by Indonesia and Malaysia at one percentage point, BMI said, citing a study by the IMF. Mainland China's inflation was projected to increase by 0.4 percentage points.

In the absence of disruptions, the report anticipates a slowdown in inflation from an average of 2.9% in 2023 to 2% in 2024 across Asia (or from 4.9% to 3.4%, excluding Mainland China).

“Higher inflation, in turn, poses additional risks to growth and could at the same time force central banks to push back their easing cycles or even tighten monetary policy,” BMI, a unit of Fitch Solutions said in the report. 

Asian economies such as Mainland China, Japan, India and South Korea are among the largest net oil importers globally. 

BMI predicted crude oil prices to remain steady at an average of $85 per barrel due to a balance between supply cuts and weaker global demand. However, the report warned that if disruptions extend beyond the Strait of Hormuz, oil prices could experience a significant increase.

“Red Sea disruptions were to persist, the resulting downward revisions to our India and Bangladesh forecasts will likely be significant and would dent our 4% growth forecast for Asia in 2024.”

The Red Sea is a key maritime shipping route linked directly to the Suez Canal, which substantially reduces the maritime trade distance between Europe and Asia and carries a significant 12% of global trade. 

(Editing by Seban Scaria seban.scaria@lseg.com)