BANGKOK -- The responses of central banks to inflation have become a key topic during the International Monetary Fund and World Bank annual meetings in Bangkok as the limits of conventional monetary policy come into sharper focus.

Speaking on Tuesday at one of the sessions, Bank of Korea Gov. Shin Hyun-song said South Korea is "at the intersection" of two powerful forces, referring to the Middle East conflict and the artificial intelligence boom. With the combination of those two forces, and through cost pushes and demand pulls, "Inflation is made worse," Shin said.

The BOK in August delivered its first back-to-back rate hike since January 2023 lifting its policy rate to 3%. "We have made it very clear that we will keep a restrictive stance on monetary policy until we're confident that inflation will converge to our target, and in a timely way," Shin said during the IMF session.

Meanwhile, the Bank of Japan has raised interest rates twice so far this year. The BOJ had typically tightened policy at roughly six-month intervals but shortened the gap to three months in September. Growing inflation risks also prompted the Reserve Bank of India last week to begin its first rate-hike cycle in over three years Australia's central bank has raised rates four times in 2026, taking borrowing costs to their highest level in 15 years, while the Philippines' central bank also raised rates by 25 basis points in August, despite weak growth.

Analysts say the supply-driven price pressures have central banks confronting a difficult trade-off: containing inflation without inflicting further damage on demand and economic growth.

"The traditional policy tool kit is limited in its ability to deal with supply-driven inflationary shocks, like those brought on by military conflict or disruptions to commodities supply," said Stefan Angrick, head of Japan and frontier markets economics at Moody's Analytics.

Higher rates "cool demand by encouraging households to save more and businesses to borrow and invest less," Angrick said. Such measures "worked reasonably well when global demand ran hot after the COVID-19 pandemic."

"It's less effective now, with global demand already fairly soft," Angrick added, noting one major exception: the AI boom, "which so far appears relatively insensitive to interest-rate changes." On Tuesday, Silvana Tenreyro, director of the IMF's research department, stressed that monetary policy should be "more restrictive" at this juncture. The organization expects global inflation to hit 4.7% this year and remain above 4% in 2027. And for several Asian markets, including China and Japan, it expects greater price rises in 2027.

"In principle, it should be more restrictive in order to make sure that inflation returns to targets," she said. "So it is important that central banks follow their mandates and keep a sufficiently restrictive stance." The Middle East conflict, now in its eighth month, has pushed up oil prices and weighed on demand, particularly in Asia. S&P Global Energy expects worldwide oil demand to decline by about 2.6 million barrels per day in 2026 from 2025 levels, with Asia accounting for about 1.5 million barrels of this drop.

The initial decline after the U.S.-Israeli attacks on Iran in late February was driven by physical supply availability. "As the year progressed, however, high fuel costs, weaker economic activity and fuel-saving behavior played a larger role in preventing demand from recovering," said Premasish Das, head of oil market research at S&P Global Energy.

"The longer prices remain elevated, the greater the risk that what begins as temporary demand curtailment becomes more permanent through efficiency improvements, electrification and fuel substitution," Das added.

Currency weakness adds another complication, potentially forcing policymakers to raise rates to stabilize exchange rates even as their economies slow.

The BOK's Shin said that central banks "can have an influence on the exchange rate," noting how an appreciation in the currency can increase the purchasing power of households struggling from inflation and thus help "shift the balance" from the externally facing export sector toward the domestic sector. Since moving to "a more restrictive" monetary policy, the South Korean won has appreciated, Shin pointed out, adding that there is likely more scope for appreciation, which is "desirable." Shin speaks during the IMF and World Bank annual meetings in Bangkok on Oct. 13.

As Shin said, many central banks have cited the AI boom as another driver of inflation. While the boom has provided support to economic growth, strong investment demand adds to inflationary pressures.

A July report by the Bank for International Settlements said that "spending on data centers, semiconductors and related infrastructure has reached around 1% of GDP in the most exposed economies." "By moving demand and supply at the same time, AI blurs the cyclical signals on which central banks rely, thereby complicating monetary policy calibration," the report warned. Supercharging the burden on central banks are high public debt levels and limited fiscal space.

According to the IMF, global public debt is near its highest levels since the end of World War II and is on track to exceed 100% of the world's combined gross domestic product soon. Debt-to-GDP ratios are especially higher in advanced economies.

IMF Managing Director Kristalina Georgieva, during her curtain raiser fireside chat with Singapore President Tharman Shanmugaratnam last week, argued that the role of a central bank is to provide price stability, not buying debt or stepping in to help ease the burden on the fiscal side. "I call this monetary cowboys running to the rescue of fiscal agents," she said.

Shanmugaratnam, a former central banker, warned that with governments holding large fiscal deficits and high debt, "their ability to deal with future crises is now much constrained," which will then make the burden "fall increasingly with each crisis on central banks to have to ease monetary policy." He also warned that highly indebted bond markets could experience bouts of disorder that require central banks to intervene to preserve financial stability, creating expectations among investors that monetary authorities will repeatedly step in. Markets could perceive "the central bank as willing and reliable in stepping in to resolve disorder, and that leads again to complacency. It makes it easier to have leverage," he said.

The central bank "cannot do everything," the BOK's Shin said on Tuesday, adding that "I think we need to mobilize the fiscal resources to actually cushion some of the worst effects. And if necessary, there may be some scope to adjust the debt obligations." "We have to strike a very broad balance between the moral hazard effect and reducing the drag from the debt hangover. But there is probably some scope for some further thinking on this," he said.