Heightened market volatility due to escalating oil prices amid the war in the Middle East between the United States (US), Iran, and Israel has raised concerns over the likelihood of an interest rate hike by the Bank of Japan (BoJ) in its upcoming monetary policy meeting on March 19.

According to a report from Reuters, three sources familiar with the central bank’s thinking have stated, "It’s become difficult for the BOJ to raise rates.”. The report further added that the Japanese central bank would need time to scrutinise how its “past rate hikes and the Middle East conflict affect the economy and prices”.

The Reuters report also stated that while rising oil prices may push up underlying inflation, they could hurt the economy and warrant a delay in rate hikes if the conflict persists.

The Japanese Yen (JPY) has been underperforming its peers since the day the war started. The currency is down almost 1% against the US Dollar. Given that the Japanese economy relies heavily on imports of oil to meet its energy needs, higher oil prices are an unfavorable situation for the Japanese Yen.

Meanwhile, BoJ Deputy Governor Ryozo Himino expressed confidence on Monday that the central bank could raise interest rates toward neutral, even if the headline inflation falls below 2%. However, he didn’t deliver an explicit timeframe on when the BoJ will raise borrowing rates.