Key facts
- The Bank of Japan raised its policy rate to 1%, the highest level since 1995.
- The Bank of England held its benchmark interest rate at 3.75% for a fourth consecutive meeting.
- Two of the nine Monetary Policy Committee members voted for a quarter-point rate increase.
- The Bank of England expects inflation to rise above 3.25% in the final quarter of this year.
- The U.S.-Iran deal is expected to reopen the Strait of Hormuz and lower oil prices.
The Bank of Japan raised its policy rate by 0.25 percentage points to 1%, marking the highest borrowing cost in Japan since 1995. Policymakers cited broadening price rises and the risk of underlying inflation deviating from their 2% target, despite a recent fall in oil prices. Governor Shinichi Uchida noted that the risk of a sharp economic deterioration from the Middle East conflict had diminished.
The Bank of England left its key interest rate unchanged at 3.75% for a fourth consecutive meeting, as inflation held steady at 2.8% year-on-year in May, below economists' expectations. While transport costs accelerated, food inflation eased and housing costs moderated. Governor Andrew Bailey stated that higher energy prices from the Iran war have already put inflationary pressure in the pipeline, and the bank's job is to manage the return to target.
The Monetary Policy Committee voted 7-2 to keep rates on hold, with external member Megan Greene and Chief Economist Huw Pill calling for a quarter-point rate increase. Most other members appeared to be in an 'active hold' stance, which Bailey views as effective tightening compared to market expectations of cuts. Sterling weakened against the dollar following the decision.
A tentative truce between the United States and Iran promised to reopen the Strait of Hormuz and lower oil prices, a potential boon for Britain. However, Bailey cautioned that it was too soon to declare the inflation threat over, with the BoE expecting inflation to rise above 3.25% in the final quarter of the year. The central bank was marginally more upbeat on growth, estimating the economy is expanding at an underlying rate of 0.2% a quarter. A weak labour market, with higher unemployment and slower wage growth, reduced the chance of new short-term inflation pick-ups creating long-term difficulties returning to target for most policymakers.