By Leika Kihara
TOKYO, Dec 4 (Reuters) – Bank of Japan Governor Kazuo Ueda said on Thursday there was uncertainty on how far the central bank could raise interest rates due to the difficulty of estimating the country’s neutral rate of interest.
“Unfortunately, the neutral rate of interest is a concept for which we can only produce an estimate with quite a wide range,” Ueda told parliament.
“We have continued to make efforts to narrow the estimated range. If we can successfully do so, we would like to disclose our findings,” he said.
For now, the BOJ must guide monetary policy without clarity on where exactly the neutral rate lies, he said.
“As such, there is uncertainty on how far we should raise interest rates,” Ueda added.
Central banks use the neutral interest rate, or the rate that neither stimulates nor cools growth, as a benchmark in setting monetary policy. But it is not directly observable and hard to estimate as factors affecting it, like productivity, change over time.
The BOJ has produced estimates suggesting Japan’s nominal neutral rate lies somewhere in a range of 1% to 2.5%.
The central bank currently sets its short-term policy rate at 0.5%. On Monday, Ueda said the BOJ would consider the “pros and cons” of a rate increase at its next policy meeting, signalling a strong chance of an increase to 0.75% later this month.
(Reporting by Leika Kihara; Editing by Christian Schmollinger and Thomas Derpinghaus)
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