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.

In a speech to business leaders, Naoki Tamura said that the central bank should raise rates to 1% or higher in the fiscal half starting in October.

Japan has “completely” ended deflation and it’s absolutely natural for the central bank to proceed with rate hikes to normalize policy, according to former BOJ Governor Haruhiko Kuroda, whose term was defined by ultra easy monetary settings.

The Bank of Japan must raise short-term interest rates to at least 1% by the second half of fiscal 2025 to contain inflation risks, board member Naoki Tamura said on Thursday.

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.