(Corrects paragraph headed “INFLATION” to say expectations do not heighten clearly, from expectations heighten clearly)
April 28 (Reuters) – The Bank of Japan kept interest rates steady on Tuesday but three of its nine-member board proposed hiking borrowing costs, signalling policymakers’ concerns over inflationary pressures from the Middle East conflict.
The central bank also sharply revised up its price forecasts and stressed vigilance to the risk of an inflation overshoot, signalling a strong chance of a rate hike in coming months.
Following are excerpts from BOJ Governor Kazuo Ueda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:
IMPACT OF MIDDLE EAST CONFLICT
“Given high uncertainty surrounding the Middle East conflict, the likelihood of achieving our forecasts has diminished. On the other hand, there is both big downside risk to growth and upside risk to inflation mainly for fiscal 2026. At present, it’s hard to judge the duration and impact on the economy and prices now. The BOJ wants to spend a bit more time scrutinising how the Middle East conflict affects the economy and prices, and whether growth and inflation risks could change.”
RISING COSTS FOR OIL-RELATED GOODS
“With underlying inflation approaching 2%, we need to be mindful that companies may more actively pass on rising costs for oil-related goods. We would like to carefully gauge various data to ensure we’re not behind the curve.”
CONDITIONS FOR ANOTHER RATE HIKE
“We don’t have any preset idea on how many months we would need (to gauge whether conditions for another rate hike could fall into place).”
PRICE FORECASTS
“Our price forecasts have been revised up significantly. This reflects our view that rising crude oil prices could temporarily push up prices for a wide range of goods and services. Underlying inflation still remains slightly below 2% and will gradually accelerate towards that level… As for medium- and long-term inflation expectations, that varies on which data you look at. But we can say it’s not completely anchored at 2% and tends to fluctuate.”
TUESDAY’S DECISION
“Our decision today is based on the view that central banks should look through temporary supply shock-driven inflation. But if such shock brings about second-round effects on underlying inflation, we must raise interest rates.”
INFLATION
“Headline inflation may rise rather sharply for the time being but that doesn’t mean underlying inflation will heighten immediately. With companies becoming more keen to raise wages and prices, however, we must guide policy appropriately, so that medium- and long-term inflation expectations do not heighten clearly and lead to an overshoot in underlying inflation.”
PRICE RISE AND SUPPLY-CHAIN DISRUPTIONS
“Prices may rise mainly for energy and energy-related goods, but it’s not clear whether that could affect underlying inflation. As for supply-chain disruptions, that will likely affect the economy in a fairly short period of time.”
CHANCES OF RATE HIKES EVEN IF LIKELIHOOD OF FORECASTS MATERIALISING COULD DIMINISH
“If inflationary risks could materialise or if they heighten significantly, we could raise interest rates on condition that downside economic risks or the risk of a sharp economic worsening are limited.”
CHANCES OF RATE HIKES EVEN WHILE THE STRAIT OF HORMUZ REMAINS CLOSED
“That depends on how developments in the Strait affect the economy and prices. We will scrutinise and predict inflation and economic risks and, depending on our assessment, could raise interest rates.”
OIL SHOCK
“We don’t see a strong chance of Japan experiencing a repeat of the 1970s-style oil shock. But one thing in common is that our policy interest rate is below levels deemed neutral to the economy. We will take that into account in guiding policy.”
IF INFLATION OVERSHOOTS TARGET…
“If inflation, especially underlying inflation, clearly overshoots our target, we would need to tighten monetary policy significantly to push down inflation. That would mean our terminal rate could exceed levels deemed neutral to the economy, which could heighten economic volatility.”
REASONING BEHIND CHANGE IN POLICY GUIDANCE
“There are several scenarios under which we could raise rates. One is when the likelihood of our forecasts materialising heightens. Even if our projections materialise, we could see growth slow somewhat. If the slowdown is not big, and if inflation moves in line with or overshoots our forecasts, we could decide to raise interest rates.”
(Reporting by Leika Kihara; Editing by Subhranshu Sahu)
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