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BOJ Holds Rate at 1%, Trims 2026 Inflation Forecast

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BOJ Holds Rate at 1%, Trims 2026 Inflation Forecast

The Bank of Japan kept its benchmark interest rate unchanged at 1% on Friday, with the Policy Board voting 8-1 to maintain rates, while its accompanying quarterly Outlook Report lowered the near-term inflation projection.

The interest rate decision matched the consensus forecast tracked by Investing.com.

One board member voted against the rate decision, proposing instead that the BOJ raise the rate to around 1.25%, citing the need to adopt a nimble approach in response to upside risks to prices caused by demand shocks. The proposal was voted down by the majority.

The decision followed the BOJ's June rate increase to the current 1.0% level, a 31-year high.

In its latest quarterly Outlook for Economic Activity and Prices, the BOJ projected that the domestic economy will maintain a moderate pace of growth despite external pressures from high crude oil prices.

The central bank cut its median headline inflation forecast for fiscal 2026 to a range of 2.3% to 2.7%, down from April's projection of 2.8% to 3.0%. Inflation is projected to ease further to between 2.2% and 2.5% in fiscal 2027.

Policy board members project real GDP growth of 0.6% to 0.7% for fiscal 2026, lifting the lower end from 0.4% in April. Fiscal 2027 GDP is predicted to grow between 0.7% and 0.8%.

The BOJ expects underlying inflation to hover around its 2% target, supported by rising wages and prices and medium- to long-term inflation expectations.

The BOJ flagged risks to its outlook including the impact of the Middle East situation on economic activity and prices, developments in global AI-related demand and the effect of foreign exchange rates on the domestic market.

"In addition to these risks, a risk considered from a somewhat long-term perspective is the impact of various changes in the environment surrounding Japan on firms' and households' medium- to long-term growth expectations and on Japan's potential growth rate," the BOJ wrote.

Ahead of the decision, Japan published a mixed set of economic reports earlier in the day, with retail sales slowing far more than expected and industrial output rising sharply, topping forecasts.

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