Bank of Japan raises interest rates to the highest since 1995

The Bank of Japan raised interest rates by 25 basis points to 1%, in response to growing price pressures from the energy shock caused by the war in the Middle East.

Japan’s central bank raised borrowing cost to the highest level since 1995, joining other major central banks in attempts to combat rising inflation.

In its post-meeting statement, the BOJ said the risk of Japan’s economy deteriorating sharply from the Middle East conflict has diminished due to progress made in procuring alternative energy supplies, though the price outlook warranted attention as companies were seen passing on rising oil costs to each other at a relatively fast pace, which could push up consumer prices across a wide range of items.

The BOJ policymakers also said that medium and long-term inflation expectations have continued to increase, pointing to a risk of underlying inflation deviating above the central bank’s price target.

BOJ’s monetary policy trajectory was complicated by the US – Iran conflict by adding inflationary pressure through higher oil costs, while hurting an economy, heavily dependent on imported fuel.

Although the latest peace deal has sparked a strong wave of optimism and eased market fears over global inflationary pressures, Japan’s wholesale inflation spiked to a 3-year high of 6.3% in May in a sign companies were already passing on higher costs from the energy shock.

Economists expect core consumer inflation to accelerate back above the BOJ’s 2% target later this year, after sliding below the level on government subsidies aimed at curbing utility bills.

Also, weak yen continues to  push up import prices and fuel inflation, that will keep the central bank on course for further monetary policy tightening.