By Leika Kihara
Oct 30 (Reuters) – The Bank of Japan kept interest rates steady on Friday, but declared victory in a nearly 14-year battle to hit its price target and signalled vigilance against inflation risks, suggesting the next rate hike could be as soon as December.
With underlying inflation roughly hitting the BOJ’s 2% target, the central bank must focus on anchoring it around that level, it said, stressing anew that its policy has entered a new, more hawkish phase open to raising rates once every few months.
Following are excerpts from Governor Kazuo Ueda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:
ON KEEPING RATES STEADY:
“We saw the need to scrutinise a bit more economic and price risks, as well as financial conditions. But underlying inflation has reached levels consistent with our price target. Financial conditions remain accommodative. There are various upside risks. We must therefore be vigilant to the risk of inflation overshooting our target.”
UNDERLYING INFLATION:
“We will look at various indicators but more importantly, what kind of mechanism is behind price moves. We will focus particularly on whether medium- and long-term inflation expectations are anchored around our target.”
SUSTAINABLY ACHIEVING PRICE TARGET:
“Our goal is to sustainably and stably achieve our price target. In that sense, we haven’t reached our goal yet. It’s important to anchor underlying inflation around our target. That doesn’t mean we will just sit and wait. We will adjust monetary policy as appropriate so that underlying inflation becomes anchored around 2%.”
UPSIDE RISKS:
“There are still upside price risks we cannot ignore. But I won’t say the risks have increased sharply from, say, one month ago.”
“It’s true Japan’s inflation expectations have yet to be anchored around our target. By taking appropriate monetary policy adjustments, we can make progress in achieving this particularly given upside price risks.”
LIKELIHOOD OF BASELINE SCENARIO:
“We will look at the likelihood of our baseline scenario being achieved, as well as risks, at each policy meeting including at our next meeting.”
CUMULATIVE IMPACT OF RATE HIKES:
“When our policy rate reaches levels deemed neutral to the economy, we can respond to both upside and downside risks. It’s hard to judge when we can judge it as such. Among factors we will look at is the cumulative impact of our past interest rate hikes. That’s why we must scrutinise financial conditions.”
PRICE PRESSURE BROADENING TO CONSUMERS:
“Looking at various data, most of them were showing underlying inflation converging around 2% … We’ve already seen clear signs that rising energy and raw material costs from the Middle East conflict were pushing up business-to-business prices. Looking at September and October data, the upward pressure is now broadening to consumer price data. Such factors work to push up underlying inflation.”
ON FUTURE PACE OF RATE HIKES:
“On the one hand, we will look at how big the risk of underlying inflation overshooting could be. On the other hand, we need to look at how accommodative financial conditions are. We must look comprehensively at such factors. The pace (of future rate hikes) will depend much on upcoming data. We can’t decide in advance how many months we will spend each time before raising rates.”
UNDESIRABLE FOR INFLATION TO RISE SIGNIFICANTLY:
“In the past, we could afford to allow underlying inflation to rise. With underlying inflation having reached 2%, it’s undesirable for inflation to rise significantly. That’s why we must respond appropriately to upside price risks.”
ON FINANCIAL CONDITIONS:
“We would like to adjust our policy rate as appropriate and bring financial conditions closer to neutral … We need to cautiously look at financial conditions as what we see now may not necessarily fully reflect the cumulative impact of past rate moves.”
ON ACTING PRE-EMPTIVELY AND QUICKLY:
“We’re not there yet. We still need to work towards narrowing the gap between our policy rate and the neutral rate, and adjust the degree of monetary accommodation.”
ON WAGE NEGOTIATIONS
“For underlying inflation to become anchored at 2%, we need to see wage negotiations between firms and unions conducted on the assumption that inflation will move around 2%. This year’s consumer inflation may average 2% or could be somewhat lower, so we need to see how this could affect next year’s wage talks.”
(Reporting by Leika Kihara; Editing by Ronojoy Mazumdar)
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