By Leika Kihara and Makiko Yamazaki
TOKYO (Reuters) -The Bank of Japan maintained ultra-low interest rates on Thursday and signalled the need to scrutinise global economic developments, highlighting its focus on risks to a fragile domestic recovery in deciding when to next tighten policy.
But the central bank projected inflation to move around its 2% target in coming years, stressing its resolve to keep hiking borrowing costs if the economy sustains a moderate recovery.
“The BOJ needs to pay due attention to the future course of overseas economies, particularly the U.S. economy, and developments in financial markets,” the BOJ said in a quarterly outlook report.
“It also needs to examine how these factors will affect the outlook for Japan’s economic activity and prices, the risks surrounding them, and the likelihood of realising the outlook.”
As widely expected, the BOJ kept short-term interest rates steady at 0.25% at its two-day meeting that ended on Thursday.
The board projected core consumer inflation to hit 2.5% in the current fiscal year ending in March 2025, followed by 1.9% in fiscal 2025 and 1.9% in 2026.
It also saw “core-core” inflation, which strips away the effect of fuel costs and is closely watched by the BOJ as a key gauge of demand-driven price moves, hit 2.0% in fiscal 2024, 1.9% in 2025 and 2.1% in 2026.
Markets will focus on Governor Kazuo Ueda’s post-meeting briefing, scheduled to be held at 3:30 p.m. (0630 GMT) for clues on the timing and pace of further interest rate hikes.
The BOJ ended negative rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress towards sustainably achieving its 2% inflation target.
Ueda has repeatedly said the BOJ will keep raising rates if the economy moves in line with its forecast. But he has also said the bank was in no rush as inflation remained moderate.
Data released on Thursday showed Japan’s factory output and retail sales rose in September, suggesting the economy was on track for a moderate recovery.
The ruling coalition’s loss of a majority in a weekend election has heightened concerns about policy paralysis, raising the hurdle for additional rate hikes, analysts say.
A slim majority of economists polled by Reuters expect it to forgo a hike this year, though most expect one by March.