BOJ to keep rates steady, see slower growth

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TOKYO, July 15 (Reuters) - The Bank of Japan is likely to keep interest rates on hold at 0.50 percent on Tuesday and warn of slower growth than it forecast a few months ago as surging oil and raw material costs bite.

The central bank is also expected to say that prices both on the wholesale and consumer level are rising faster than it forecast in its half-yearly economic outlook report in late April.

As concerns over the U.S. banking sector grow, Bank of Japan board members may also look into the implications of the U.S. government's package unveiled on Sunday to rescue government-sponsored mortgage lenders. [ID:nN13387357]

The BOJ policy board is expected to announce the results of its two-day interest rate-setting meeting some time between noon and 2 p.m. (0300-0500 GMT).

The Japanese central bank has said that the rising cost of oil and food is the main culprit in the latest slowdown in the economy and that it is more concerned about economic downside risks than accelerating inflation in the near future.

Masaaki Shirakawa, the bank's governor, has also said the BOJ will guide policy flexibly while carefully examining various risks facing the economy -- comments many investors have taken as meaning that there will be no policy change in the near future.

Traders will be awaiting Shirakawa's post-meeting news conference, comments from which will be embargoed until some time after 4 p.m. (0700 GMT).

Japanese government bond futures hit a two-month high on Tuesday after renewed concerns about the U.S. banking sector boosted U.S. Treasuries overnight while hurting Tokyo stocks. [JP/]

The Nikkei share average fell more than 1 percent, with banks such as top lender Mitsubishi UFJ Financial Group (8306.T) under pressure on worries about the health of U.S. banks. [.T]

U.S. stocks fell on Monday on concern about the banking sector, with the shares of major banks plunging as Friday's collapse of IndyMac outweighed optimism over the government's plan to stabilise Fannie Mae (FNM.N) and Freddie Mac (FRE.N). [ID:nN14448894] [ID:nN14463671]

SLOWER GROWTH

The BOJ will also scrutinise what's happening at home.

BOJ sources have said the bank is likely to say Japan's growth in the fiscal year to next March may be lower than the board members' median forecast of 1.5 percent, after a review of its economic forecasts published in April.

The outcome of the so-called "mid-term" review will be released along with the central bank's monthly economic report at 3 p.m. (0600 GMT).

The bank's tankan survey this month showed that sentiment among big manufacturers was at a five-year low and that companies are facing the tightest increase in capital spending in six years.

Many economists now think the economy contracted in the April-June quarter from the previous three months and it could remain shaky in the coming months if exports -- a major driver of Japan's growth -- sputter on slower global economic growth.

On the other hand, recent rises in domestic wholesale and consumer prices has been far larger than projected either by the BOJ or most economists.

Wholesale price inflation shot up to a 27-year high of 5.6 percent in June, way above the BOJ's forecast for this financial year of 2.5 percent.

Core consumer prices, which exclude fresh foods but include energy costs, rose 1.5 percent in May and are seen rising around 2 percent or above in the coming months, again well above the bank's forecast of a 1.1 percent rise. (Reporting by Hideyuki Sano; Editing by Hugh Lawson)