Japan’s central bank has raised the cost of borrowing to its highest level in 17 years, as it tries to curb rising prices.

The move by the Bank of Japan (BOJ) to raise its short-term policy rate to 0.5% comes just hours after the latest economic data showed prices rose last month at the fastest pace in 16 months.

The BOJ’s last interest rate hike in July, along with a weak jobs report from the US, caught investors around the world by surprise, which triggered a stock market selloff.

The bank’s governor, Kazuo Ueda, signalled this latest rate hike in advance in a bid to avoid another market shock.

According to official figures, core consumer prices in Japan increased by 3% in December.

Last year, the BOJ raised the cost of borrowing for the first time in 17 years.

The decision came as some of the country’s biggest corporations increased salaries for their workers to help them cope with the rising cost of living.

Wages in the country had flatlined since the late 1990s as prices rose very slowly or even fell causing policy makers to stick to an ultra-loose monetary policy until after the pandemic.