Bank of Japan lifts key rate to 1.25%, flags upside inflation risk
The Bank of Japan raised its policy rate by 25 basis points to 1.25%, warning that underlying inflation could overshoot its 2% target.
The Bank of Japan has raised its key policy interest rate by 25 basis points to 1.25%, lifting the uncollateralised overnight call rate to its highest level since 1995. The decision was taken at the central bank's latest Monetary Policy Meeting, where the Policy Board approved the move by a 7-2 majority.
In its statement, the Bank said it would encourage the overnight call rate to remain at around 1.25%. The rate had previously stood at 1.0%.
Alongside the policy rate decision, the Bank set the basic loan rate under its complementary lending facility at 1.5%. It also decided to revise loan rates for the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas and the Funds-Supplying Operations against Pooled Collateral.
Separately, the Bank said it would remove the Great East Japan Earthquake from the category of designated disasters under its disaster-area funding operation, following the loan disbursement in May 2027, citing factors including the operation's recent usage.
The central bank flagged a risk that underlying consumer price inflation could deviate upward from its 2% price stability target. It pointed to firms shifting their behaviour more towards raising wages and prices, and to medium- to long-term inflation expectations that are rising.
The Bank also noted risks to its baseline outlook, saying attention remains warranted on how the situation in the Middle East, the expansion in AI-related demand and movements in foreign exchange rates affect Japan's economic activity and prices.
Japan's economy has been recovering moderately, the Bank said, though some weakness persists, partly reflecting developments in the Middle East.
The Bank reiterated that it will continue to raise the policy interest rate and adjust the degree of monetary accommodation in response to developments in economic activity and prices as well as financial conditions. It has been raising interest rates since 2004, and the latest increase takes the policy rate to its highest level in about three decades.