By Leika Kihara
TOKYO (Reuters) -The Bank of Japan will raise interest rates again if trend inflation accelerates toward its 2% target as expected, governor Kazuo Ueda said, keeping alive market expectations of a further withdrawal of monetary support later this year.
"If our price forecasts change, that would also be a reason to change monetary policy. But we don't have any preset idea on the specific timing and pace" of rate hikes, Ueda told parliament on Tuesday.
The remarks come ahead of the BOJ's two-day policy meeting that ends on Friday, when the board is set to keep interest rates unchanged and announce fresh quarterly growth and inflation forecasts.
The BOJ is likely to project inflation will stay around its 2% target for the next three years, sources have told Reuters, which would cement expectations the central bank will raise interest rates again this year from current near-zero levels.
The central bank ended eight years of negative rates and other remnants of its unorthodox policy last month, making a historic shift away from decades of massive monetary stimulus that was aimed at quashing deflation and revitalising growth.
Ueda said the BOJ must maintain ultra-loose monetary policy for the time being as trend inflation, or price rises driven by domestic demand and measured by scrutinising various indicators, remains "somewhat below 2%".
While core consumer inflation has stayed above its 2% target for two years, the BOJ has said it would go slow on further rate hikes to ensure price rises are driven more by robust domestic demand and prospects for sustained wage increases.
The weighted median inflation rate, a key measure of Japan's trend inflation, rose 1.3% in March from a year earlier, data showed on Tuesday, slowing from a 1.4% gain in February and marking the smallest year-on-year increase in 11 months.
"We will set our short-term interest rate target at a level deemed appropriate to sustainably and stably achieve our 2% inflation target," Ueda said.
"If trend inflation accelerates toward our target as we expect, we will adjust the degree of monetary stimulus by raising interest rates," he said.
Ueda said the future policy course was data-dependent, adding that it was hard to predict how soon the BOJ could gather enough data to determine the timing of its next rate hike.
Economists polled by Reuters were divided on the timing of the BOJ's next hike with some betting on action in the third quarter, while others projecting October-December or beyond.