BoJ Keeps Key Interest Rate Near Zero

(RTTNews) - The Bank of Japan left its key interest rate unchanged near zero and the bank's latest projections showed the underlying inflation staying around 2 percent that further damped expectations for aggressive tightening in future.

The BoJ policy board, headed by Governor Kazuo Ueda, unanimously decided to hold the overnight interest rate at around 0 to 0.1 percent.

The board also voted to conduct its bond purchase programme in line with the decision made at the March meeting.

In March, the BoJ had raised its interest rates for the first time in 17 years and became the world's last central bank to end negative rates amid signs that inflation is strengthening.

The central bank had also decided to end its yield curve control, or YCC, policy that capped the interest on the 10-year Japanese government bonds, or JGBs, around zero.

In the Outlook for Economic Activity and Prices report released alongside with the policy announcement on Friday, the bank said inflation is set to rise through fiscal 2025 driven by the rise in crude oil prices and waning of the effects of government's economic measures. The bank upgraded its inflation outlook for the fiscal 2024 to 2.8 percent from 2.4 percent. Likewise, the projection inflation excluding food for the fiscal 2025 was lifted to 1.9 percent from 1.8 percent. Inflation is seen at 1.9 percent in the fiscal 2026.

However, the projections showed the core inflation figure that excludes fresh food and energy staying around 2 percent during the forecast horizon.

Risks to prices are skewed to the upside for fiscal 2024 but are generally balanced thereafter, the bank said.

At the same time, the bank lowered its growth projection for the fiscal 2024 to 0.8 percent from 1.2 percent citing lower private consumption.

The Japanese economy is forecast to expand 1.0 percent in both the fiscal 2025 and 2026. The outlook for the fiscal 2025 was thus retained from the previous projection. Capital Economics' economist Marcel Thieliant said the BoJ signaled growing confidence in meeting its inflation target and it is likely to increase its policy rate further to 0.3 percent in July.

"...the Bank isn't done hiking interest rates yet, though we think that a further slowdown in underlying inflation will prevent it from hiking its policy rate more than once," Thieliant said.

Markets perceived the latest BoJ statement as generally dovish, mostly due to the lack of any reference to policymakers' concern regarding the recent weakness in the Japanese yen. Following the BoJ decision, the yen sank to a fresh 34-year low against the US dollar. The weakness has again raised chances of market intervention by authorities.