TOKYO: The Bank of Japan raised interest rates to a 31-year high on Tuesday, marking another landmark step in normalising monetary policy as it focused on taming price pressures from the energy shock caused by the Iran war.
The hike was the first since December and aligns the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank.
In a widely expected move, the BOJ decided to raise its short-term policy rate to 1% from 0.75%, taking borrowing costs to levels unseen since 1995.
"The price pass-through stemming from rising 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 BOJ said in a statement announcing the decision.
"Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target," it said.
The decision was made by a 7-1 vote. Governor Kazuo Ueda missed the meeting and did not vote due to a two-week treatment in hospital for an infected liver cyst.
All eyes will be on any hints Deputy Governor Shinichi Uchida could drop on the pace and timing of future rate hikes at a news briefing he will hold on behalf of Ueda.
The Middle East conflict has complicated the BOJ's policy path by adding inflationary pressure through higher oil costs, while hurting an economy heavily reliant on imported fuel.
While the peace deal between the U.S. and Iran eased market fears over global inflationary pressures, 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.
Analysts 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.
The BOJ kept policy steady at its previous meeting in April but sharply revised up its price forecasts and stressed its vigilance to the risk of an inflation overshoot. Three of its nine board members proposed a hike to 1%.
A flurry of hawkish BOJ signals since then have led markets to almost fully price in the chance of a June rate increase. A Reuters poll showed economists projecting the BOJ to raise rates to 1.25% in the fourth quarter after a hike in June to 1%.
A weak yen, which pushes up import prices and broader inflation, will also keep the BOJ under pressure to stay on course for further rate hikes, analysts say.
The BOJ's hike comes in a busy week for global central banks.
The U.S. Federal Reserve is widely expected to hold its benchmark interest rate steady on Wednesday but officials have recently signaled their rising concern about inflation, which has led more in the market to now predict its next move as being a hike rather than a cut. - Reuters
