BOJ set to raise key rate to 1.0% in June, 1.25% by year-end: Reuters poll

By Satoshi Sugiyama

TOKYO, June 10 (Reuters) - The Bank of Japan will raise its key interest rate this month and again in the fourth quarter, taking borrowing costs to 1.25% by year-end, as it grows more wary of inflation risks than downside hazards to the economy, a Reuters poll of economists showed.

BOJ Governor Kazuo Ueda all but cemented a June rate hike in a speech last week, marking a clear shift in the central bank's narrative toward fighting inflation and opening the door to more frequent increases in borrowing costs.

With the yen hovering around the critical 160-per-dollar level that could trigger intervention, analysts say any delay in policy tightening could put further downward pressure on the Japanese currency.

In the June 2 to June 8 poll, 94% of economists, 66 of 70, forecast the policy rate would rise to 1.0% by the end of June, up from 65% in a May survey. All but one of 69 respondents expected the rate to reach at least 1.0% by the end of September.

"Underlying inflation is approaching the 2% target, and the output gap points to supply shortages, so inflation is highly likely to accelerate unless the current substantial monetary easing is scaled back," said Atsushi Takeda, chief economist at Itochu Research Institute.?

FURTHER RATE RISES EXPECTED

Beyond June, more than three-quarters of respondents, 53 of 67, expected the BOJ to raise rates to 1.25% in the fourth quarter. Forecasts showed two-thirds of economists now expect the policy rate to reach 1.50% in the second quarter of next year, bringing forward expectations from the third quarter projected in May.

"Given the yen's recent depreciation and rising interest rates, the BOJ is likely to judge that the risks on the downside of postponing a rate hike are increasing," said Sosuke Nakamura, economist at Citigroup.?

The BOJ will conclude a two-day policy meeting on June 16, just ahead of the Federal Reserve's policy decision.

While markets still expect the Fed to leave interest rates unchanged, investors are increasingly pricing in the possibility of a rate hike by end-December after stronger-than-expected inflation data and a resilient labour market, highlighted by the latest blockbuster payrolls report.

Domestically, revised gross domestic product (GDP) data released on Monday showed Japan's economy lost momentum in the January-March quarter from the previous three months.

Even so, economists expect the broader economy to remain resilient in the coming months, with repercussions from the Iran war unlikely to significantly dent private consumption or corporate investment, reinforcing the BOJ's case for continued monetary policy normalisation.

Economists' forecasts for Japan's annual average GDP growth were unchanged from the May survey at 0.6% for fiscal 2026 and 0.9% for fiscal 2027. Core consumer inflation forecasts were also unchanged, at 2.4% for fiscal 2026 and 2.2% for fiscal 2027.

(Other stories from the Reuters global economic poll)

(Reporting by Satoshi Sugiyama in Tokyo; Polling by Susobhan Sarkar and Renusri K in Bengaluru; Editing by Vivek Mishra and Matthew Lewis)