The Bank of Japan is likely to raise interest rates again this year and see borrowing costs reach levels deemed neutral to the economy by the end of 2027, a senior International Monetary Fund official said on Thursday.

The Bank of Japan will continue to raise interest rates if underlying inflation accelerates toward its 2 per cent target as projected, a senior central bank official said on Wednesday."Underlying inflation is heading toward 2 per cent but still remains below that level now.

The Bank of Japan is increasingly blaming chronic labor shortages, not stagnant demand, as the main reason for its weak economic activity, a justification it may use to lift interest rates beyond what was initially expected.

The Bank of Japan must raise short-term interest rates to at least 1% by the second half of fiscal 2025 to contain inflation risks, board member Naoki Tamura said on Thursday.

In a speech to business leaders, Naoki Tamura said that the central bank should raise rates to 1% or higher in the fiscal half starting in October.