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.

Bank of Japan policy board member Naoki Tamura said, “Raising short-term interest rates to at least around 1% in the latter half of fiscal 2025 is necessary to reduce upside risk to prices and achieve the price stability target in a sustainable and stable manner.

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 interest rates to at least 1% by the second half of the fiscal year beginning in April, hawkish board member Naoki Tamura said on Thursday, remarks that pushed up the yen as they reinforced bets of a near-term rate hike.