Bank of Japan Maintains Interest Rates Unchanged, Three Members Advocate for Rate Hike

The Bank of Japan kept its benchmark interest rate at 0.75% for the third time in a row, in line with market expectations. However, internal disagreements have significantly increased, with the voting ratio narrowing from the previous 8-1 to 6-3, with Takahashi, Takada, and Tamura, all proposing an interest rate hike to 1.0%, only to be defeated by the majority.

The core reason for the three is that the price risk has skewed to the upside. Takada believes that the price stability target is "basically achieved," while Takahashi emphasizes that there is upward pressure on inflation in a loose financial environment.

Economic slowdown, but acceleration of inflation

The Bank of Japan significantly downgraded its growth expectations, cutting the GDP growth rate for fiscal 2026 from 1.0% to 0.5%, and the fiscal years of 2027 and 2028 are respectively expected to be 0.7% and 0.8%. Analysts pointed out that the cost pressures brought about by yen fluctuations and the reorganization of the global supply chain are hindering consumption and exports.

In contrast, the inflation forecast has been significantly revised upward. The core CPI forecast for fiscal 2026 jumped from 1.9% to 2.8%, far exceeding the 2% target; for fiscal 2027 and 2028, they are 2.3% and 2.0%, respectively.

The "core-core CPI," excluding energy, is even more robust, maintaining a high level of 2.6% for fiscal years 2026 and 2027, and still reaching 2.2% in fiscal 2028, indicating that inflation is shifting from cost-driven to wage-price spiral-driven and is gradually taking root in the Japanese economy.

Forward guidance: Interest rate hike direction remains unchanged

The central bank reiterated that it will continue to raise interest rates but emphasized the need to closely monitor the impact of the situation in the Middle East on the economy and prices, and to prudently grasp the timing and pace of interest rate hikes.