By Leika Kihara
URAWA, Japan, Aug 27 (Reuters) – Bank of Japan Deputy Governor Ryozo Himino on Thursday stressed the need for timely interest rate hikes with a focus on mounting inflation risks, reinforcing dominant market expectations for a near-term increase in borrowing costs.
But he refrained from giving explicit signals on the timing of the next rate hike, saying only that “in-depth deliberations” on price pressures should be held at each policy meeting.
While the economy was weathering the hit from the Middle East conflict, elevated fuel costs and rising chip prices from global AI demand were pushing up inflation, Himino said.
A weak yen could also push up inflation at a faster pace than in the past, he said, adding the impact of exchange-rate moves on inflation is among key factors the BOJ will look at in guiding policy.
“If underlying inflation deviates above our 2% target, that would have an adverse impact on the economy. We should pay greater attention to upside risks to prices than in the past,” Himino said in a speech to business leaders.
“In-depth deliberations should be held at each monetary policy meeting with these perspectives in mind,” he said.
Himino’s speech has been closely watched by markets for clues on the pace and timing of future rate hikes, given his past record delivering clear hints on an upcoming policy shift.
“He didn’t rule out the chance of a September rate hike and was generally hawkish as expected,” said Shotaro Mori, senior economist at SBI Shinsei Bank. “The September meeting is likely to be live.”
Sources have told Reuters the BOJ is set to raise the rate as soon as September and is considering hiking more aggressively thereafter from the current pace of roughly two times a year.
A recent spike in wholesale inflation and hawkish BOJ commentary have led markets to nearly fully price in the chance of a September hike.
EASING OFF THE ACCELERATOR
Himino countered the view by some analysts that hiking rates further could hurt a fragile economy, arguing that adjusting still-loose financial conditions would help distribute assets more efficiently to investment with growth potential.
With underlying inflation approaching 2%, the BOJ must focus on stabilising price growth around that level, he added.
“Raising rates in a timely manner will help avoid a spike in inflation and abrupt rate hikes in the future,” and ultimately be in the best interest of smaller firms, Himino said.
After raising its key interest rate to a 31-year high of 1% in June, the BOJ kept monetary policy steady in July but issued its strongest comments to date about mounting inflation risk.
A recent spike in wholesale inflation, which reached 7.2% in July from a year earlier, highlighted mounting price pressure from the Middle East conflict that will likely push up consumer prices with a lag, analysts said.
“As we are still pressing on the accelerator, or keeping financial conditions accommodative, I believe we will need to ease off in a timely manner through rate hikes,” Himino said.
“In doing so, we need to check various bits of information” including economic and price developments and financial conditions, he said.
(Reporting by Leika Kihara, additional reporting by Makiko Yamazaki and Takahiko Wada; Editing by Christian Schmollinger and Sam Holmes)
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