By Leika Kihara and Satoshi Sugiyama

TOKYO (Reuters) -The Bank of Japan maintained ultra-low interest rates on Thursday and signalled the need to scrutinise global economic developments, highlighting its focus on risks to a fragile domestic recovery in deciding when to next tighten policy.

As widely expected, the BOJ kept short-term interest rates at 0.25% at its two-day meeting, its first since an inconclusive general election that analysts say will complicate efforts to normalise interest rates after years of ultra-easy policy.

But the central bank also projected inflation to move around its 2% target in coming years, stressing its resolve to keep hiking borrowing costs if the economy sustains a moderate recovery.

“The BOJ needs to pay due attention to the future course of overseas economies, particularly the U.S. economy, and developments in financial markets,” the BOJ said in a quarterly outlook report.

“It also needs to examine how these factors will affect the outlook for Japan’s economic activity and prices, the risks surrounding them, and the likelihood of realising the outlook.”

The phrases were added to the report’s portion explaining the BOJ’s policy guidance, which also repeated that the bank would continue to raise rates if the economy and prices move in line with its forecasts.

“We have seen some positive U.S. data recently. But there is still uncertainty on how past rate hikes by the Fed affect the economy and prices,” BOJ Governor Kazuo Ueda said at a press conference after the meeting. “We need to monitor developments carefully.”

The board cut its core consumer inflation forecast for fiscal 2025 to 1.9% from 2.1% in the previous estimate in July, but said risks were skewed to the upside for that year. It kept unchanged its fiscal 2026 core inflation forecast at 1.9%.

It also saw “core-core” inflation, which strips away the effect of fuel costs and is closely watched by the BOJ as a key gauge of demand-driven price moves, hit 1.9% in fiscal 2025 and 2.1% in 2026 – both unchanged from July.

The yen remained under pressure on the BOJ’s decision to keep ultra-low rates, standing at 153.34 versus the dollar. The benchmark 10-year government bond yield was little changed after the announcement.

The report repeated the BOJ’s view that it expects underlying inflation to converge around 2% some time around late 2025 or beyond, as service prices continue to rise moderately.

“The decision was as expected as it was likely hard for the BOJ to hike rates at this timing. The BOJ probably won’t be able to shift policy until the political situation stabilises,” said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

“I still think there’s a chance of a December rate hike,” though there is an increasing risk of the timing being delayed due to uncertainty over the domestic political situation and the outcome of the U.S. presidential election, he said.

The BOJ ended negative rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress towards sustainably achieving its 2% inflation target.

Ueda has repeatedly said the BOJ will keep raising rates if the economy moves in line with its forecast. But he has also said the bank was in no rush as inflation remained moderate.

Data released on Thursday showed Japan’s factory output and retail sales rose in September, suggesting the economy was on track for a moderate recovery.

The ruling coalition’s loss of a majority in a weekend election has heightened concerns about policy paralysis, which could raise the hurdle for additional rate hikes, analysts say.

A slim majority of economists polled by Reuters expect the BOJ to forgo a hike this year, though most expect one by March.