BOJ seen leaving rates alone, trimming forecasts

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By Leika Kihara

TOKYO, Oct 31 (Reuters) - The Bank of Japan is expected to leave interest rates unchanged but to cut its growth and inflation forecasts at a one-day policy meeting under way on Wednesday, reinforcing expectations that the next rate hike will be delayed.

With rates seen on hold at 0.5 percent, the focus is on how cautious the central bank's half-yearly outlook report will be in describing mounting downside risks -- among them slowing U.S. growth, volatile markets and a recent raft of soft Japanese data.

"While the BOJ may stick to its main economic scenario, downside risks will keep it from hiking rates any time soon," said Naoki Iizuka, senior economist at Mizuho Securities.

"The question is whether the BOJ will cling to its rate-hike stance or signal more clearly that it will stand pat until the subprime crisis runs its course," he said.

The BOJ is expected to reiterate in its outlook report its stance that the economy is on track for modest but sustained growth and that rates need to rise gradually from current very low levels.

But that stance is becoming increasingly tough to sell given soft Japanese consumer prices and worries that the U.S. subprime woes could dent global economic growth.

Markets now expect the BOJ to wait until March or later before raising rates. Swap contracts on the overnight call rate <JPONIBOJ=TRDT> are pricing in less than a 20 percent chance of a BOJ rate rise by December, a 30 percent possibility for January and about a 55 percent chance for March.