Dec. 20 (Bloomberg) -- The Bank of Japan cut its assessment of the economy for the first time in three years, signaling it's unlikely to raise the benchmark interest rate from 0.5 percent anytime soon.

The central bank today kept the key rate unchanged in its first unanimous decision since June and said the pace of growth ``seems to be slowing'' because of a slump in housing.

The reassessment came a day after the government slashed its growth forecast because stricter rules for obtaining building permits caused housing starts to plummet. Rising oil and raw materials costs are also eroding profits at Japanese companies just as a slowing U.S. economy dims prospects for world growth.

``Japan's economy isn't ready for a rate increase,'' said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. ``The plunge in housing investment is causing much more harm than the central bank expected.''

The yen traded at 113.23 per dollar at 5:08 p.m. in Tokyo from 113.28 before the interest-rate announcement. Today's rate decision was expected by all 44 economists surveyed by Bloomberg.

``There is absolutely no change to our basic monetary policy stance,'' Governor Toshihiko Fukui said today in Tokyo. He said the housing slump would only be temporary.

The economy is still in a ``virtuous economic cycle,'' in which rising profits will filter into higher wages and consumer spending, Fukui said.

Key Pillar

That scenario is a key pillar of the Bank of Japan's monetary policy, the governor added. The bank has pledged to raise interest rates, the lowest in the industrial world, if the economy keeps expanding and prices rise according to its forecast.

``Fukui is trying hard to let the market know the central bank is veering toward raising rates,'' said Mari Iwashita, a strategist at Daiwa Securities SMBC Co. in Tokyo. ``They'll stay on hold until the economy stabilizes once housing investment and the U.S. economy pick up.''

The yield on Japan's benchmark 10-year bond rose 3.5 basis points to 1.52 percent.

The Bank of Japan raised the key rate from near zero percent in July 2006, the first increase in almost six years, amid signs the economy was emerging from deflation.

Fukui has said Japan's borrowing costs need to rise to prevent excessive investment and help to sustain economic growth. He repeated the argument in a Dec. 3 speech.

Monthly Assessment

The bank's latest monthly assessment contrasts with the previous 17, which said the economy was ``expanding moderately.'' Of 31 economists surveyed before today's decision, 21 said the bank will keep the key rate on hold at least until the second half of 2008.

The government yesterday lowered its growth forecast for this fiscal year to 1.3 percent from 2.1 percent.

Weak profits at small companies could hamper wage growth and consumer spending, Fukui said this month. He acknowledged that the benefits of Japan's corporate-led expansion aren't flowing to households as quickly as he'd anticipated.

Export growth slowed in November, the Finance Ministry said today, as the U.S. housing recession caused shipments to Japan's biggest market to tumble for a third month.

Confidence at Japan's large manufacturers and service companies fell to the lowest in more than two years, the central bank's Tankan survey showed on Dec. 14. Companies surveyed said costs were rising faster than they could pass on to clients.

``They're not really in a position to be putting rates up when everyone else is worried about global growth and global stability,'' said Graham Davis, a director at the Economist Intelligence Unit in Tokyo.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: December 20, 2007 03:12 EST