Former senior BOJ official predicts: October rate hike "genuinely possible," probability of delay until next year extremely low

A former Bank of Japan executive director who oversaw monetary policy said the BOJ may raise its benchmark rate for a second straight month at its October meeting, earlier than most economists expect. The basic pace may be once every three months, but theres also a reasonable possibility the BOJ will hike at two consecutive meetings, Kazuo Momma, a former executive director, said in an interview on Friday. Id say the probability is around 20% to 30%. Mommas comments came a week after Governor Kazuo Uedas board raised the policy rate, just three months after a hike in June, marking a faster pace than the roughly once-every-six-months cadence seen previously. Ueda explained that the BOJ has entered a new phase, shifting its focus from nursing underlying inflation toward 2% to preventing it from overshooting that level. That language was intended to signal to markets that a faster pace of rate hikes may be coming now that the policy focus has shifted, according to Momma. The BOJ has been strongly emphasizing that theres a possibility core inflation may rise above 2%, Momma said. Given that, I dont think the risk will diminish over the next three months. If anything, its more likely to rise. Data on price trends released by the BOJ on Friday supported that view. The central banks inflation gauge excluding fresh food and temporary factors accelerated to 2.6% in August from 2.3% in July. In addition to upside price risks, the BOJ also stresses that the benchmark rate at 1.25% is still low, Momma said. Putting those two points together, the most persuasive argument right now is that the BOJ should raise rates relatively quickly, said Momma, now an executive economist at Mizuho Research & Technologies. In Mommas base-case scenario, the BOJs policy rate will rise to a terminal rate of about 2% by June or July next year, implying the board may deliver three more quarter-point hikes. The median estimate of economists surveyed sees a terminal rate of 1.75%. This month is said to mark the first time the BOJ, the Federal Reserve and the European Central Bank have all raised rates in the same month. After the September BOJ meeting, the yen weakened despite the rate adjustment, as two board members Toichiro Asada and Ayano Sato voted against the hike. The two are the newest board members appointed earlier this year by Prime Minister Sanae Takaichi, who has consistently supported monetary easing. I dont know whether dissenting votes will appear again, but I dont think they will change the BOJs course of raising rates, Momma said, adding the government is unlikely to try to stop the BOJ from normalizing policy, as doing so could trigger further yen weakness. A weak yen exacerbates inflationary pressure because Japan relies heavily on imports for energy and food. Overnight index swap market pricing showed traders saw a 30% chance of a rate hike at the next decision-making meeting on Oct. 30 as of Friday. Economists have been more cautious about the pace of hikes. A survey conducted before the September meeting showed 58% of respondents expected the BOJs next rate hike in January, while about 35% predicted December. Momma disagrees with the majority view. The debate is really about whether the BOJ will conclude it cant wait until December to raise rates, Momma said. I think the probability of delaying the next hike until January or later is extremely low.