BoJ's Koeda says BoJ needs to continue to raise the policy interest rate in response to developments in the economic activity and prices, as well as financial conditions

Says: Given the situation in the Middle East, she sees some possibility that underlying inflation may exceed 2% looking ahead. Thinks BoJ needs to continue examining the extent to which underlying inflation is anchored. Underlying inflation is already around 2%. Developments over the past month or two may have increased the likelihood of a risk scenario in which high crude oil prices persist. Considering such supply and demand contexts, prices could continue to increase across a wider range of items down the road. Reasonable for BoJ to raise the policy interest rate at an appropriate pace to address high inflation while also considering the trade-offs for the economy. If real interest rates continue to deviate markedly in a negative direction from the natural rate of interest, unintended distortions could arise in future resource allocation. Short-term real interest rates will fall further if BoJ does not change its policy interest rate in response to a rise in inflation or inflation expectations. BoJ’s decision on how to address issues surrounding policy normalisation will depend on factors such as the size of the output gap and the stability of the natural rate of interest. If the economy does not see a major downturn, more attention needs to be paid to the side effects of a further decline in real interest rates. BoJ should proceed steadily with normalising its balance sheet in a predictable manner, while ensuring flexibility.