By Leika Kihara

WASHINGTON (Reuters) – The Bank of Japan is likely to maintain negative short-term interest rates until inflation durably hits 2%, but could allow long-term yields to move more flexibly around its target, a senior International Monetary Fund official said on Friday.

The BOJ must maintain policy loose by keeping the short-term policy rate at -0.1%, a view that is shared by its officials, Ranil Salgado, the IMF’s Japan mission chief, told a media roundtable in Washington.

But Salgado said it was important that longer-term bond yields, including the 10-year zone the BOJ targets, are allowed to move more flexibly.

“Since March, with difficulties in global banking sector yields have been allowed to move up and down. That’s good,” as rising long-term yields help ease the strain prolonged low rates inflict on financial institutions’ profits, he said.

Under the BOJ’s yield curve control (YCC), the central bank sets a -0.1% target for short-term rates and guides the 10-year bond yield around zero as part of efforts to sustainably achieve its 2% inflation target.

“The short-term rate is unlikely to be changed soon” until inflation durably hits the BOJ’s 2% target, he said.

Salgado was less sure about the long-term yield target.

“I think they’re going to stick to it, but maybe they’ll review it in the next few months or so. But I’m not sure,” he said, when asked how soon the BOJ could tweak the 10-year yield target.

With its huge bond buying to defend YCC criticised as distorting bond pricing, markets have been rife with speculation the BOJ could tweak or end YCC under new Governor Kazuo Ueda.

In his inaugural news conference on Monday, Ueda said it was important to maintain his predecessor’s ultra-loose monetary policy, including YCC, for now.

Salgado said the BOJ had many tools at its disposal to keep borrowing costs low, even if it were to change YCC.

“Simply continuing quantitative easing is some of the tools they have, even if they decide to change YCC,” he said.

Aside from its interest rate targets, the BOJ continues to buy bonds and risky assets such as exchange-traded funds (ETF).

(Reporting by Leika Kihara; editing by Jane Merriman)

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