The Bank of Japan kept interest rates ultra-low on Thursday and signaled the need to carefully scrutinize global economic developments, highlighting risks to a fragile domestic recovery in deciding when to tighten policy next.

But the central bank forecast inflation would hover around its 2 percent target in coming years, underscoring its determination to keep raising borrowing costs if the economy maintains a moderate recovery.

“The BOJ must pay due attention to the future development of overseas economies, especially the US economy, and developments in financial markets,” the BOJ said in a quarterly outlook report.

“It must also examine how these factors will affect the outlook for Japan’s economic activity and prices, the risks surrounding them and the likelihood of the outlook being realized.”

The phrases were added to the portion of the report explaining the BOJ’s policy guidance, which also reiterated that the bank will continue to raise rates if the economy and prices move in line with its forecasts.

As expected, the BOJ kept short-term interest rates steady at 0.25% at its two-day meeting that ended on Thursday.

The council cut its core consumer inflation forecast for fiscal 2025 to 1.9 percent from 2.1 percent in its previous estimate in July, but said risks were tilted to the upside for the year. It kept its core inflation forecast for fiscal 2026 unchanged at 1.9%.

It also saw core inflation, which strips out the effect of fuel costs and is closely watched by the BOJ as a key gauge of demand-driven price movements, hit 1.9% in fiscal 2025 and 2.1% in 2026 – both unchanged. from July.

The yen remained under pressure on the BOJ’s decision to keep rates ultra-low, settling at 153.34 against the dollar. The benchmark 10-year Treasury yield was little changed after the announcement.

The report reiterated the BOJ’s view that core inflation is expected to converge around 2% in late 2025 or beyond as service prices continue to rise moderately.

“The decision was as expected because it was probably hard for the BOJ to raise rates at this time. The BOJ probably won’t be able to change policy until the political situation stabilizes,” said Kazutaka Maeda, an economist at the Research Institute Meiji Yasuda. .

“I still think there is a chance of a rate hike in December,” although there is a growing risk that timing will be delayed due to uncertainty over the domestic political situation and the outcome of the US presidential election, he said.

Markets will focus on Governor Kazuo Ueda’s post-meeting briefing scheduled for 3:30 pm (0630 GMT) for clues on the timing and pace of further interest rate hikes.

The BOJ ended negative rates in March and raised short-term interest rates to 0.25 percent in July, seeing Japan as making progress toward sustainably reaching its 2 percent inflation target.

Ueda has repeatedly said the BOJ will continue to raise rates if the economy moves in line with its forecasts. But he also said the bank was in no rush because inflation remained moderate.

Data released Thursday showed factory output and retail sales in Japan rose in September, suggesting the economy is on track for a moderate recovery.

The ruling coalition’s loss of majority in the weekend election raised concerns about policy paralysis, which could raise the bar for further rate hikes, analysts say.

A narrow majority of economists polled by Reuters expect the BOJ to hold off on a hike this year, though most expect one by March.