Tokyo [Japan], September 18 (ANI): The Bank of Japan (BOJ) raised its key interest rate by 25 basis points to 1.25 per cent from 1.0 per cent earlier, while warning that underlying inflation could exceed its 2 per cent target amid rising wage and price expectations.

At its latest Monetary Policy Meeting, the BOJ's Policy Board approved the rate increase by a 7-2 majority.

"At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a 7-2 majority vote....The Bank will encourage the uncollateralized overnight call rate to remain at around 1.25 percent," the Japanese central bank said in a release.

The BOJ also flagged risks from developments in the Middle East, rising AI-related demand and movements in foreign exchange rates, which could affect Japan's economic activity and prices.

"While there are various risks to the baseline scenario, attention continues to be warranted on the impact that the situation in the Middle East, the expansion in Al-related demand, and developments in foreign exchange rates have on Japan's economic activity and prices," it said. 

The central bank has been raising its interest rates since 2004, however, this is the highest level since 1995. Further, the apex bank said that it will "continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions."

Japan's economy has recovered moderately, although some weakness persists, partly due to the impact of developments in the Middle East.

"As for underlying CPI inflation, there is a risk that it will deviate upward to a level above the price stability target of 2 percent, given factors such as firms' behavior shifting more toward raising wages and prices and medium- to long-term inflation expectations rising," it noted. 

Alongside the policy rate decision, the BOJ set the basic loan rate applicable under the complementary lending facility at 1.5 per cent. It also decided to revise loan rates for the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas and the Funds-Supplying Operations against Pooled Collateral.

The BOJ further decided to remove the Great East Japan Earthquake from the category of designated disasters under the disaster-area funding operation following the loan disbursement in May 2027, citing factors including the operation's recent usage. (ANI)