By Leika Kihara
TOKYO, April 13 (Reuters) - Bank of Japan Governor Kazuo Ueda said on Monday economic and price developments were moving roughly in line with the bank's forecasts, but called for vigilance to the impact of escalating conflict in the Middle East.
"Global financial markets are unstable and crude oil prices are rising sharply due to Middle East tensions. We must be vigilant to future developments," Ueda was quoted in a speech read out by his deputy, Ryozo Himino.
The speech was closely
watched by markets for any hints on whether the BOJ would raise interest rates at its next policy meeting on April 27-28 nL4N40T1P9, as fading hopes of an early end to the Iran war keep markets volatile and muddle the economic outlook.
In his speech, Ueda said a gradual economic recovery was keeping underlying inflation on track to hit the BOJ's 2% target with companies offering solid pay increases in this year's wage negotiations.
But he said rising crude oil prices would hurt Japan's economy, adding that a protracted Middle East war could weigh on factory output amid supply chain disruptions.
While higher oil costs would push up energy prices in the short-term, it could exert both upward and downward pressures on underlying inflation, he said.
"If the output gap worsens, that could weigh on underlying inflation. On the other hand, if rising crude oil prices heighten the public's medium- and long-term inflation expectations, that could push up underlying inflation," Ueda said.
"Give lingering uncertainty over the Middle East situation, we will scrutinise how future developments affect the economy, prices and financial conditions, as well as risks and likelihood of our baseline projections materialising," Ueda said on the outlook for monetary policy.
The reference to Middle East uncertainty marks a shift from March's guidance, when the BOJ said only that it would continue raising rates in line with improvements in the economy and prices.
(Reporting by Leika Kihara; Editing by Christian Schmollinger and Shri Navaratnam)
