- Policy rate still far away from neutral level, Tamura says
- Global slowdown likely not as big as expected
- Inflationary pressures have increased
Oct 16 (Reuters) - The Bank of Japan should lift interest rates closer to levels deemed neutral to the economy given mounting inflationary pressures, hawkish board member Naoki Tamura said on Thursday.
While uncertainty remains over the global economic outlook, there is a strong possibility that the slowdown in overseas growth will not be as significant as initially thought, he said.
Inflationary pressures, on the other hand, have increased and heightened the chance Japan will durably achieve the BOJ's 2% inflation target earlier than expected, Tamura said in a speech delivered to business leaders in Naha, Okinawa.
The remarks increase the likelihood that Tamura, who unsuccessfully proposed raising interest rates to 0.75% from 0.5% in September, will do so again at the next policy meeting on October 29-30.
Given there are both upside and downside economic risks, the BOJ does not need to immediately raise interest rates to levels that restrict growth, Tamura said.
"That said, with risks to prices becoming more skewed to the upside, the BOJ is now in the phase of deciding on raising interest rates to levels a little closer to neutral," he said.
Starting to raise interest rates gradually now will prevent the BOJ from being forced to hike sharply in the future, Tamura said.
CONSUMER INFLATION HAS EXCEEDED TARGET
The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably hitting its 2% inflation target.
Consumer inflation has exceeded the target for well over three years and was at 2.7% in August, but the BOJ has treaded cautiously in hiking rates as it focused on risk to Japan's export-reliant economy from U.S. tariffs.
Tamura said in the speech he believed Japan's neutral interest rate, or the level that neither cools nor overheats growth, should be at least around 1%.
Given the difficulty of precisely estimating the neutral level of rates, the only way to determine the right level is to raise rates gradually while scrutinising how the economy and prices respond, he said.
"The BOJ has so far raised the policy interest rate to 0.5%, but my view is that the increase has had an extremely limited impact on Japan's economy," Tamura said.
"I believe that the policy interest rate is still far away from the neutral interest rate," he added.
At a subsequent news conference, Tamura said he "won't rule out the possibility that the BOJ's inflation target is achieved in the latter half of fiscal 2025," even though impacts from U.S. tariffs could delay the timing.
He also noted that a weaker yen could magnify upside price pressure.
Tamura and another board member, Hajime Takata, dissented from the BOJ's decision in September to hold interest rates steady.
Asked whether he would again propose a rate hike at a policy meeting this month, Tamura declined to comment, saying it would depend on economic and price situations as well as debate at the meeting.
While their views underscore a hawkish tilt in the nine-member board, Governor Kazuo Ueda has repeatedly called for going slow in raising rates due to uncertainty over the impact of U.S. tariffs on Japan's economy.
Most analysts expect the BOJ to raise interest rates again by January next year, though they are divided on whether a hike could come in October, December or January.
Bets on an October rate hike receded after Sanae Takaichi, known as an advocate of aggressive monetary easing, won the ruling party's leadership race this month.
But there is uncertainty over whether she can win enough votes in parliament to be chosen as Japan's first female premier.
Reporting by Leika Kihara and Makiko Yamazaki; Editing by Chang-Ran Kim and Jamie Freed
Source: Reuters