BOJ Signals More Rate Hikes After Raising Benchmark Rate to Highest Since 1995

The Bank of Japan signaled it may raise interest rates further after lifting its benchmark rate to the highest level since 1995.

Bloomberg reported on June 24 that, in a summary of opinions from its June 15-16 monetary policy meeting, the BOJ said some board members viewed additional rate increases as appropriate because core consumer inflation is approaching 2% and financial conditions remain accommodative.

The BOJ raised its policy rate to 1% last week. It was the first increase since December and brought the benchmark to its highest level since 1995. At the time, the central bank left the door open to further tightening but gave no specific timeline.

The meeting summary also showed some policy board members argued the benchmark rate should be pushed closer to the neutral rate. One member said the neutral rate appears to be around 2% and that it would be desirable to consider additional rate increases at intervals of several months.

Markets are leaning toward another rate hike this year. A Bloomberg survey showed about 90% of economists expect an additional increase before year-end, while more than one-third see a move in October. Forecasts for the terminal rate were also raised to 1.75% from 1.5%.

The BOJ is also watching the yen's recent weakness. The dollar-yen exchange rate has been trading in the ¥161 range, near the yen's weakest level since 1986. The central bank said it will closely examine how exchange-rate moves affect prices and the economy.

Japan's corporate services price index rose 3.3% in May from a year earlier, matching market expectations. The continued rise in service prices is supporting the BOJ's case for further tightening.