By Leika Kihara and Takaya Yamaguchi
TOKYO, April 20 (Reuters) - The Bank of Japan is likely to hold off raising interest rates next week, said five sources familiar with its thinking, as fading prospects of a near-term end to the Middle East war keep the country's economic and price outlook highly uncertain.
While a final decision may be a close call and dependent on developments over U.S.-Iran peace negotiations, the central bank is leaning towards standing pat this month to spend more time gauging
the fallout from the conflict, the sources said.
"Given so much uncertainty, the BOJ probably would see it feasible to stand pat this month," one of the sources said, a view echoed by another source.
A third source said the BOJ is unlikely to hike rates with markets having priced out the chance of a rate increase this month. The sources spoke on condition of anonymity as they were not authorised to speak publicly.
While markets have been reducing bets on a rate rise at the BOJ's April 27-28 meeting, this is the first confirmation of the thinking inside the central bank.
Even if the BOJ were to keep rates steady next week, it is likely to signal its readiness to raise borrowing costs as soon as June in the face of mounting inflationary pressures, the sources said.
The protracted Middle East conflict has complicated the BOJ's plan to push up still-low borrowing costs with surging oil prices adding to mounting price pressures, while threatening to hurt an economy hugely reliant on imported fuel from the region.
(Reporting by Leika Kihara and Takaya Yamaguchi, additional reporting by Takahiko Wada and Makiko Yamazaki; Editing by Toby Chopra)
