BOJ set to lift rates next week but offer few clues on terminal, sources say

The Bank of Japan (BOJ) is expected to raise interest rates next week, most likely by 25 basis points, according to four sources familiar with the bank's thinking. This would bring the BOJ's policy rate to 1.25 percent, the highest level since 1990. The sources say the BOJ may indicate faster future tightening if price pressures increase inflation risks.

The economy is projected to recover moderately, and price pressures are building, according to the sources. Even if the BOJ raises rates to 1.25 percent, financial conditions are expected to remain loose. The recent strengthening of the yen could ease inflation pressure by moderating import costs, but a renewed surge in fuel prices will continue to concern the BOJ about inflation risks.

Underlying inflation is close to 2 percent, so the BOJ needs to be vigilant about upside price risks. The BOJ raised rates to 1 percent in June and has signaled a likelihood of further hikes if economic and price conditions align with its projections. Most analysts expect the BOJ to hike rates to 1.25 percent at the September meeting and potentially higher later in the year.

The BOJ may not have a predetermined terminal rate, as it depends on how past rate hikes influence the economy and the extent to which firms pass on rising input costs to consumers.