BOJ keeps interest rates steady as expected; says CPI inflation now at target
On Friday, the Bank of Japan maintained interest rates as anticipated, affirming that underlying consumer inflation has reached its 2% target and is expected to stay at that level. The BOJ kept its overnight call rate at 1.25%, with eight out of nine board members voting in favor of maintaining the rate, while member Takata Hajime advocated for a 25 basis point increase.
The central bank reiterated its commitment to raise interest rates in response to growth and inflation. The BOJ stated that underlying consumer price index inflation, excluding volatile fresh food and energy prices, is now "generally consistent with the price stability target of 2 percent" and is expected to remain around that level.
Analysts at Capital Economics interpreted the statement as the BOJ declaring victory in its long battle against inflation, potentially paving the way for additional rate hikes. The bank lowered its core CPI projections for the fiscal year ending March 2027 to a range of 2.4% to 2.5%, down from the previous range of 2.3% to 2.6%.
The BOJ warned of risks to medium- to long-term inflation expectations, such as rising energy prices, artificial intelligence-related demand, and a weak yen. Additionally, the BOJ announced plans to increase the pace of selling its large holdings of exchange-traded funds, beginning in January 2027, with an annual pace of around 860 billion yen ($5.47 billion) compared to the previous pace of 330 billion yen.
This shift represents a more stringent monetary policy stance, reversing years of accommodative policy to counteract persistent inflation. Friday's decision followed the release of Tokyo CPI data, which remained significantly above the BOJ's 2% target in October. Despite this, the central bank remains optimistic about the Japanese economy, forecasting moderate GDP growth, albeit at a slower pace, for the current fiscal year.
The bank revised its GDP growth forecast for the current year to between 0.7% and 0.8%, up from the previous range of 0.6% to 0.7%.
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