The Bank of Japan hiked interest rates to a 31-year high Tuesday as it battles inflation caused by the Middle East war, even after Washington and Tehran agreed on a peace deal. The central bank for the world’s fourth-largest economy raised its benchmark rate 25 basis points to 1.0 per cent, the highest since 1995 and marking the first increase since December.
The widely expected decision followed rate rises by the European Central Bank and in Indonesia last week, after the conflict caused economic havoc and rising prices worldwide. With US inflation at a three-year high, expectations are growing that the Federal Reserve will follow suit, albeit not at new boss Kevin Warsh’s first rate-setting gathering this week.
“While higher crude oil prices have been exerting downward pressure on economic activity, the economy has generally been supported by factors such as high levels of corporate profits and an improvement in the employment and income situation,” the BoJ said. The consumer price index (CPI) has been below two per cent, thanks in part to government energy subsidies.
“However, the price pass-through stemming from the rise in crude oil prices has been progressing at a relatively fast pace in business-to-business transactions, which could spread to an increase in consumer prices across a wide range of items,” the central bank added.
“Against this backdrop, taking into account that medium- to long-term inflation expectations have also continued to rise, there is a risk of underlying CPI inflation deviating upward to a level above the price stability target of two percent.” Looking ahead, the BoJ said that it will “continue to raise the policy interest rate and adjust the degree of monetary accommodation”.
“In this regard, it will consider the timing and pace of adjustment, while closely monitoring the impact of the future course of the situation in the Middle East on Japan’s economic activity and prices,” it said. READ ALSO: [UPDATED] Nigeria’s Inflation Rises To 15.93% In May The United States and Iran have agreed to end their three-month Middle East war on all fronts and reopen the Strait of Hormuz, through which previously about a fifth of world oil passed.