Central banks must weigh geopolitical risks in policy decisions, experts say

Central banks across South and Southeast Asia are being urged to give greater weight to geopolitical risks when formulating monetary policy, moving beyond traditional economic indicators to account for emerging political tensions and regional instability.

Experts argue that waiting for geopolitical threats to fully materialise before responding leaves central banks playing catch-up, potentially forcing reactive policy shifts that can roil financial markets. By incorporating these risks into their baseline scenarios and stress tests, policymakers can build more resilient frameworks that anticipate rather than merely react to disruptions.

The challenge lies in quantifying inherently uncertain geopolitical variables—from trade tensions to territorial disputes to political transitions—and determining how they might affect inflation, growth, and currency stability. Regional central banks have traditionally focused on established economic models, but the frequency of unexpected political developments has exposed gaps in conventional policy thinking.

For India and other regional economies, the implications are significant. Geopolitical shocks can trigger sudden capital outflows, commodity price spikes, and supply chain disruptions that existing monetary frameworks may not adequately address. Central bankers are therefore reconsidering how to balance traditional inflation-targeting mandates with the need to prepare for broader economic disruptions.

The shift represents a broader recognition that modern monetary policy cannot operate in isolation from the geopolitical environment in which it functions.