Ex-BOJ board member sees one rate rise by year-end

TOKYO, April 6 (Reuters) The Bank of Japan, which scrapped its five-year-old super-loose monetary policy last month, is expected to raise interest rates once by the end of the year and twice in 2007, a former board member said on Thursday.

Teizo Taya, a member of the nine-member policy board until December 2004, said he disagreed with expectations in the money market that the BOJ would raise rates twice this year, both by a quarter of a percentage point from current levels around zero.

''The probability of a rate rise in July-September is 40 percent, while that for one in October or November is 60 percent,'' he said in a speech in Tokyo.

''I've been saying that there'll be one rise this year. Next year, there may be two,'' he said.

Markets have been on tenterhooks for clues on when the BOJ will raise interest rates after it shifted from a deflation-fighting policy of flooding the banking system with excess money to a more conventional one of controlling rates.

Taya, currently a special counsellor at Daiwa Institute of Research, said gains in the consumer price index may not be enough for the BOJ to justify two rate increases this year, despite speculation in the money market for such a move.

He expected the BOJ's twice-yearly outlook report on the economy and prices due on April 28 to forecast core consumer prices to rise 0.5 percent in the fiscal year that started on April 1 and 0.8-1.0 percent in fiscal 2007/08.

That meant price forecasts would narrowly meet the BOJ board's definition of price stability, Taya said.

Last month the board defined mid- to long-term price stability as inflation of zero to 2 percent, with views centred on 1 percent.

''The BOJ has said that (the range) is not directly linked to monetary policy, but it'll be hard to fend off such views,'' he said.

Taya expects the BOJ to take four to five years to guide interest rates to a ''neutral'' rate, which he saw as 2.5-3.0 percent.

BOJ Governor Toshihiko Fukui has said the central bank will eventually move step by step to bring interest rates to a neutral rate, or one that neither bolsters nor hinders economic growth.

Neutral rates are hard to pinpoint, however, and there has been no real consensus among economists since calculations are based on varying assumptions about factors such as inflation, growth and output.

REUTERS MP BD2047