Bank of Japan Official Predicts October Rate Hike as Probability Rises

A former senior Bank of Japan official predicts an October rate hike is 'highly plausible' and has a probability of around 20% to 30%. Kazuo Momma, a former Executive Director of the Bank of Japan responsible for monetary policy, stated this in an interview last Friday. The timing is earlier than most economists had anticipated.

Momma believes that the basic pace could be once every three months, but there's also a reasonable possibility that the Bank of Japan will raise interest rates at two consecutive meetings. This would mean a faster pace of interest-rate hikes as the central bank shifts its focus from lifting underlying inflation to preventing it from exceeding 2%.

The Bank of Japan has consistently emphasized that core inflation could rise above 2%. Given this, Momma doesn't believe that risk will abate over the next three months. In fact, he thinks it's more likely to increase. The central bank's inflation gauge accelerated to 2.6% in August, up from 2.3% in July.

Momma also stated that the benchmark interest rate remains on the low side at 1.25%. Putting these two points together, he believes the most compelling argument is that the Bank of Japan should raise interest rates relatively quickly. In his baseline scenario, the policy rate would rise to a terminal rate of around 2% by June or July next year.