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.
The remarks increase the likelihood that Tamura, who unsuccessfully proposed raising interest rates to 0.75 per cent from 0.5 per cent 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 in a speech.
Tamura said he believed Japan’s neutral interest rate, or the level that neither cools nor overheats growth, should be at least around 1 per cent.
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 per cent, 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.
