By Leika Kihara
WASHINGTON (Reuters) – Bank of Japan Governor Kazuo Ueda said on Friday the central bank will “most likely” raise interest rates if underlying inflation continues to rise, and will begin to scale back its massive bond purchases in the future .
The central bank needs to maintain loose monetary policy for the time being as underlying inflation remains “slightly below” its 2% target and long-term inflation expectations are still close to 1.5%, he said Ueda.
After ending various unconventional monetary easing measures in March, however, the BOJ has brought more flexibility to its policy and may adjust its short-term interest rate target depending on how upcoming data unfolds, it said. added.
“We will proceed with caution, initially assessing the impact of our recent policy changes on the economy and inflation, then considering further adjustments if deemed appropriate, perhaps extracting insights into the neutral rate along the way,” Ueda said at a seminar hosted by the Peterson Institute. for the International Economy.
The BOJ will also begin cutting purchases of Japanese government bonds (JGBs), although the timing and extent of the reduction are yet to be determined, Ueda said.
“Regardless of what the data says in the near future, we would like to find a way and timing to reduce the amount of JGB purchases,” he said, adding that the central bank will take time to make a decision.
These remarks reinforce market expectations that the BOJ will raise its short-term interest rate target from the current 0-0.1% range this year.
In March, the BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy, making a historic shift away from its focus on reviving growth and reversing deflation with decades of massive monetary stimulus.
Markets will be looking for clues about the timing of the next rate hike when the BOJ releases new quarterly forecasts for growth and inflation at its policy meeting next week.
While the BOJ will watch developments in inflation expectations in deciding when to raise rates, it will first look at wage data and how rising wages might affect prices of services, Ueda said.
“If underlying inflation continues to rise, we will most likely raise interest rates,” he said.