Introduction: Japan lifts interest rates to 31-year peak

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The inflationary effects from the US-Iran war keep spreading through the global economy, even after the US and Iran reached a memorandum of understanding to conclude their conflict.

Amid mounting price pressures, the Bank of Japan increased interest rates to a 31-year high today, becoming the second G7 central bank after the European Central Bank to raise borrowing costs since the Iran war started.

Officials in Tokyo increased the BoJ short-term policy rate to 1 percent from 0.75 percent, bringing borrowing costs to levels unseen since 1995.

The BoJ explained the decision by noting that firms were transferring higher oil expenses to one another at a relatively swift rate. This could push consumer prices higher across many goods, the bank stated.

The action came even after a 4.75 percent decline in oil prices the previous day.

Positively, the BoJ noted that the chance of a sharp downturn in Japan economy from the Middle East conflict has lessened. It pointed to the government support package aiding households with elevated fuel expenses.

The agenda

9.45am BST: Treasury select committee hearing on the Office for Budget Responsibility
10am BST: ZEW economic sentiment index
1.30pm BST: US housing starts and business permits data

Key events

1h agoBoJ welcomes US-Iran peace memorandum
2h agoNikkei hits record closing high
2h agoThames Water rescue at risk as government opposes weak deal
2h agoIntroduction: Japan lifts interest rates to 31-year peak

There are indications that conditions are beginning to normalize in the Gulf.

Offshore marine support firm Gulf Marine Services informed the City that all its support vessels previously withdrawn because of the Iran war have now returned successfully to their original contracts.

GMS self-propelled self-elevating support vessels accommodate workers and equipment at offshore oil and gas sites.

Mansour Al Alami, executive chairman of GMS, commented:

We are very pleased to confirm that the fourth and final evacuated vessel has now returned to hire. This is a significant milestone, and we are encouraged by the positive momentum we are seeing both operationally and on the geopolitical front.
The swift and safe return of all four vessels is a testament to the professionalism of our crews and the strength of our client relationships, which have remained robust throughout this period.

BoJ welcomes US-Iran peace memorandum

The Bank of Japan deputy governor, Shinichi Uchida, has welcomed the US-Iran peace agreement.

At a press conference after today rate increase, Uchida described the agreement as a welcome development, stating:

Compared with our previous meeting in April, the U.S. and Iran have signed a memorandum. That is a welcome move. Having said that, there is uncertainty on the pace of improvement in distribution of oil.

Uchida also highlighted inflationary risks, noting:

Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening, and there is a risk that underlying inflation may deviate from our target.
With underlying inflation approaching 2 percent, it is important to ensure we achieve our target stably.

Uchida is filling in for BoJ governor Kazuo Ueda, who was hospitalized last week for treatment of a liver cyst infection.

Investors may feel relieved that the Bank of Japan avoided a sharper interest rate increase today, notes Susannah Streeter, chief investment strategist at Wealth Club.

The Bank of Japan has raised its key interest rate to a 31-year high as a precaution, to try and stop energy costs being embedded more deeply across the economy.
The move increasing the short-term policy rate to 1 percent from 0.75 percent was widely expected, but it represents a step-change in monetary policy for Japan, given it pushes borrowing costs to levels not seen since 1995. There was some relief that the move was not more hawkish, with even a 50-basis-point hike having been discussed.
That is why investors responded with relief and stocks rallied even higher

Nikkei hits record closing high

The BoJ interest rate hike did not stop Japan Nikkei share index from reaching a fresh record high.

The Nikkei surged past the 70,000-point mark for the first time ever, and closed the day at a new record of 69,404.5 points.

Other Asia-Pacific markets have also continued to advance today, amid ongoing optimism over the US-Iran peace deal.

Thames Water rescue at risk as government opposes weak deal

Thames Water has moved closer to nationalisation after government ministers reportedly objected formally to the 10 billion pound rescue deal proposed by its creditors.

According to The Times this morning, environment secretary Emma Reynolds has written to water regulator Ofwat this week to express concerns about the plan for the struggling, indebted utility giant.

They explain:

Reynolds is understood to be concerned that the creditors offer for Thames Water is weak, not least after 15 years of mismanagement and failure.
Those who support placing Thames into special administration argue that this would give the company a fresh start by forcing existing investors to write off losses and allow the company to be sold without its existing debt pile.

Under the proposed rescue deal, Thames Water creditors would inject 3.35 billion pounds of fresh equity, and write off a third of their debt.

They are also seeking up to 15 years leniency from river pollution rules, arguing that this will make it easier to upgrade the troubled company water network.

Reynolds intervention comes just days after Manchester mayor Andy Burnham told the Guardian that Thames Water should be nationalised, just days before the Makerfield by-election which if he wins could lead to a leadership challenge against Keir Starmer.

If the government were to approve the deal with creditors, then Thames Water which currently has around 20 billion pounds of debt would be part-controlled by the billionaire Trump donor and hedge funder Paul Singer.