THE Bank of Japan cut its economic growth forecast, raised its inflation estimate and kept the benchmark interest rate at 0.5 percent, saying higher commodity prices are hurting the expansion.

The world's second-largest economy will grow 1.2 percent in the year ending March 31, slower than the 1.5-percent forecast on April 30, the central bank said in a statement in Tokyo yesterday. Consumer prices, excluding fresh food, will climb 1.8 percent, more than the 1.1 percent projected three months ago, it said.

Growth is "slowing further" because higher energy and raw-materials costs are discouraging businesses and consumers from spending, the bank said. "Downside risks to the economy demand attention," it said, indicating the bank has no plans to resume a policy of gradually raising interest rates anytime soon.

"They're more concerned about the downside risks to growth," Masaaki Kanno, chief economist at JPMorgan Chase & Co in Tokyo, who used to work at the bank, told Bloomberg News. "Unless wage rates pick up, the bank isn't so concerned about inflation."

In April, the BOJ shelved a policy calling for higher borrowing costs. The benchmark rate, doubled in February 2007, is the lowest among major economies.

"Economic growth is slowing further, reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and materials prices," the central bank said. Still, Governor Masaaki Shirakawa said the economy "is not facing stagflation" because growth will pick up and inflation will moderate.

Gross domestic product will expand 1.5 percent in the year starting April 1 and core consumer prices will rise 1.1 percent, the policy board forecast.

The biggest reason for Japan's economic slowdown is the worsening terms of trade spurred by higher import prices, the governor said.