BOJ to raise rates with eye on Iran war fallout, central bank official says

By Leika Kihara

TOKYO, April 3 (Reuters) - The Bank of Japan will continue to raise interest rates while keeping a close eye on how the Middle East conflict affects the economy and underlying inflation, a senior central bank official said on Friday.

While rising fuel costs from the conflict could hurt the economy by making Japan's terms of trade worse, they could push up underlying inflation by raising long-term inflation expectations, said Koji Nakamura, the BOJ's executive director overseeing monetary policy, in parliament.

Upward pressure from higher fuel costs on underlying inflation might be bigger than in the past as companies are becoming more eager to push up prices and wages, he said.

"If our economic and price projections were to materialise, we will likely continue to raise interest rates," Nakamura said, adding that the degree and timing of future increases will depend on economic, price and financial conditions.

"We will reach an appropriate decision at each policy meeting by updating our economic, price projections and our views on risks using data available at the time," he added.

The BOJ ended a decade-long, massive stimulus in 2024 and raised interest rates several times including in December, when it took its short-term policy rate to a 30-year high of 0.75%.

With surging fuel costs and higher import prices from a weak yen adding inflationary pressures to the economy, markets have priced in roughly a 70% chance of another rate hike this month.

(Reporting by Leika Kihara; Editing by Thomas Derpinghaus)