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Japan’s central bank left interest rates steady Tuesday amid concerns that rising inflation is sapping consumer demand, deflating business sentiment and pointing toward an economic slowdown.

The seven-member Bank of Japan policy board voted unanimously during a two-day meeting to take a wait-and-see approach and keep the benchmark overnight call rate unchanged at 0.5%.

In its statement, the central bank underscored the impact of soaring gas and food prices, rising material costs and signs of slower global growth that are weighing on the world’s second-largest economy.

It lowered Japan’s economic expansion prospects for this fiscal year through March, downgrading its projection for real gross domestic product growth to 1.2%, down from 1.5% forecast in April.

At the same time, the central bank said it now sees core inflation — which excludes volatile fresh food prices — at 1.8% compared with its April outlook of 1.1%.

"The Bank … will carefully assess the future outlook for economic activity and prices, closely considering the likelihood of its projections as well as factors posing upside or downside risks, and will implement its policies in an accordingly flexible manner," the policy board said in the statement.

While acknowledging a slowdown, Bank of Japan Gov. Masaaki Shirakawa told reporters later in the day that the country had not fallen into stagflation, according to Kyodo news agency. Stagflation is a troublesome brew of sluggish economic growth and high inflation and unemployment,

In his first public comments since the announcement of a government-backed bailout plan of U.S get a free credit report. mortgage giants Fannie Mae and Freddie Mac, Shirakawa expressed concern about the U.S. economic outlook and noted that recovery will likely take longer than expected, Kyodo reported.

The central bank has not tightened monetary policy since February 2007, and economists predict it won’t make any moves for about a year.

Japan’s core inflation rose 1.5% in May from a year earlier, the quickest pace since a consumption tax hike in March 1998.

Merrill Lynch economists Takuji Okubo and Masayuki Kichikawa project inflation in the coming months to exceed 2% — the upper limit of the Bank of Japan’s target inflation range. But the central bank is unlikely to replicate a rate hike by its European counterpart anytime soon, they said in a research report.

"As long as wage growth remains subdued, we see little risk of a temporary shock to the CPI turning into persistent inflation," they said. "The BOJ is likely to wait out the global storm of commodity inflation without tightening."

Japan’s benchmark Nikkei 225 Stock Average lost 1.96% Tuesday to finish at 12,754.56 — the first time the index has closed below 13,000 since April 15.

The next Bank of Japan policy board meeting is scheduled for August 18-19. 

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