BOJ Set for 1.25% Rate Hike Amid Inflation Concerns

The Bank of Japan (BOJ) is expected to raise interest rates next week by 25 basis points, bringing its policy rate to 1.25%, a level not seen in 31 years.

This move suggests that the BOJ may be tightening monetary policy faster than anticipated, especially given that it only raised rates to 1% in June and pledged further increases if economic and price developments align with its projections.

Analysts polled by Reuters believe the BOJ will hike rates to 1.25% at the September 17-18 meeting, then to 1.5% by end-March next year, and eventually reach a terminal rate of at least 1.75% in 2027.

The BOJ's decision comes as underlying inflation is nearing 2%, prompting concerns about an inflation overshoot due to price pressures from the Middle East conflict, a weak yen, and brisk AI-related demand.

BOJ board member Kazuyuki Masu suggested that there are no imminent signs of a spike in inflation warranting a big hike next week, but market players had expected a 50-basis-point increase due to the high expectations for a rate hike.