BoJ slashes inflation forecast, keeps rates at 0.5%

Apr 27 | Updated: Apr 28 2007, 08:17am hrs
The Bank of Japan (BoJ) slashed its inflation forecast close to zero and kept the benchmark interest rate unchanged, saying prices will take another year to accelerate.

Core consumer prices will rise 0.1% in the 12 months ending March 2008 and 0.5% the following year, the central bank said in Tokyo today in its semi-annual outlook. Policy makers had previously predicted a 0.5% inflation rate this year. Stalling consumer prices will make it harder for the BoJ to raise its 0.5% overnight lending rate to prevent excessive business investment. The cheapest official borrowing cost among major economies has driven the yen to a record low against the euro and high-yielding currencies.

Consumer price data damped any speculation the BoJ will bring forward an interest-rate increase, said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities, adding that rates will be on hold until August. Thats a bad development for the yen.

Core consumer prices, which exclude fresh food, declined 0.3% in March from a year earlier, the government statistics bureau said on Friday, the second straight monthly drop. Other government reports today showed factory output unexpectedly slumped 0.6%, retail sales declined for a sixth month, this time by 0.7%, and household spending rose a less-than-expected 0.1%.