July 12 (Bloomberg) -- The Bank of Japan voted 8-1 to keep its benchmark interest rate unchanged as it waits for more proof that economic growth will be sustained and inflation will take hold. Board member Atsushi Mizuno opposed the decision.

Governor Toshihiko Fukui and his policy board colleagues held the key overnight lending rate at 0.5 percent at a two-day meeting that ended today, the central bank said in Tokyo.

Policy makers are confident in their outlook for the economy, though they want to examine more data before increasing borrowing costs, Fukui said. The Bank of Japan will probably raise the key rate, the lowest among major economies, next month, according to economists and investors.

``Governor Fukui's commitment to raising interest rates will remain firm,'' said Yasunari Ueno, chief market economist at Mizuho Securities Japan Co. ``Any proposals for a rate hike support expectations of an August move.''

The yen traded at 122.01 per dollar at 5:19 p.m. in Tokyo compared with 122.21 before the announcement. The yield on Japan's 10-year bond rose 2 basis points to 1.9 percent.

``There's no change in our expectations that the economy will continue this lasting growth,'' Fukui said at a news briefing. Second-quarter gross domestic product may be a ``bit weaker than the first quarter,'' though that won't determine the outcome of the August policy meeting, he said.

By waiting one more month, the Bank of Japan's policy makers are able to check a report on second-quarter gross domestic product to be published in mid-August, as well as monthly data on consumer prices and industrial output. Production fell for a third month in May and consumer prices excluding fresh food slipped 0.1 percent, a fourth monthly drop.

Upper House Election

They also avoid any charges of a rate increase distracting from an Upper House election on July 29.

``The pretext for putting off a rate hike is that the certainty about the sustainability of economic growth has not increased,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. ``However, the true reason could be that the BOJ wants to avoid paying unnecessary political cost'' before the election.

Mizuno was one of three policy makers who unsuccessfully proposed a rate increase in January, a month before the central bank doubled the key rate to 0.5 percent. The absence of other dissenters today makes it difficult to conclude that an August rate increase will occur.

``The 8-1 vote gave about the weakest lead possible in terms of the timing of the next rate hike,'' said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. ``A unanimous vote would have dampened expectations of an August rate hike. Conversely, two or three dissenters would have been taken as a repeat of the January meeting.''

Mid-Term Review

Investors see a 69 percent chance of an August rate increase, according to Credit Suisse Group calculations based on the exchange of interest payments.

Policy makers said in the bank's mid-term review of its half-yearly economic outlook that the economy and prices are largely improving in line with their April forecast.

The world's second-largest economy will grow 2.1 percent in the year ending March 31 and the following 12 months, the bank said in April. Core consumer prices will rise 0.1 percent this fiscal year and 0.5 percent the year after.

Japan's GDP probably slowed to an annual rate of 1 percent in the second quarter from 3.3 percent in the previous three months as exports and consumption lost momentum, according to the median estimate of economists. The government will release GDP in the week before the bank's Aug. 22-23 policy meeting.

Second-Quarter Growth

Slower growth probably won't deter the bank from raising rates because policy makers will check the trend by averaging GDP data over the most recent three quarters, said Morgan Stanley's Sato. The economy expanded 5.4 percent in the final quarter of 2006.

Of 34 economists surveyed by Bloomberg News, 21 said the central bank will raise the key rate to 0.75 percent in August and eight said it will act in September. Three of the remaining five economists predicted October, one said November and the other said the rate will stay at 0.5 percent this year.

``Rate increases won't be impeded unless the economy deteriorates or deflation returns,'' said Ryutaro Kono, chief economist at BNP Paribas Securities Japan. ``The Bank of Japan will probably keep raising rates every six months.''

Interest rates are rising globally. South Korea's central bank raised its benchmark interest rate to a six-year high of 4.75 percent today on concern record lending to small companies may spur inflation. The Bank of England lifted its key rate for a fifth time since August last week.

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

Last Updated: July 12, 2007 04:21 EDT