By Leika Kihara and Makiko Yamazaki

TOKYO (Reuters) -The Bank of Japan kept interest rates steady and sharply cut its growth forecasts on Thursday, suggesting uncertainty surrounding U.S. tariffs and the hit to exports could keep policy in a holding pattern for some time.

But the central bank projected inflation would stay roughly on course to hit its 2% target in coming years, a sign that risks from U.S. tariffs could delay, but not derail, its rate hike plans.

BOJ Governor Kazuo Ueda said the timing for underlying inflation to converge toward the central bank’s 2% target has been “pushed back somewhat” as trade tensions cloud the outlook.

But he said the BOJ still expects conditions for further rate hikes to eventually fall into place.

“We’ll enter a period in which both inflation and wage growth will likely slow somewhat. But we expect a positive cycle of rising wages and inflation to continue due to a severe labour shortage,” Ueda told a press conference.

“It’s hard to judge now when we can see the likelihood of our scenario being achieved,” he said. “As such, we would like to take a flexible approach in our policy response.”

As widely expected, the BOJ kept short-term interest rates steady at 0.5% by a unanimous vote.

In a quarterly outlook report released after the meeting, the BOJ cut its economic growth forecast for the fiscal year ending March 2026 to 0.5% from 1.1% projected three months ago. It also slashed its growth forecast to a 0.7% expansion for the following fiscal year from 1.0% in January.

The BOJ now expects underlying consumer inflation to reach levels consistent with its 2% target around the latter half of fiscal 2026 and onward, the report said, pushing back the timing by around a year from the previous report in January.

“Recent developments surrounding tariffs will weigh on Japan’s economy by slowing global growth, hurting corporate profits, and prodding households and companies to hold off on spending due to heightening uncertainties,” Ueda said.

“But we expect such downward pressure to recede thereafter, as overseas economies resume a moderate recovery,” he added.

Japanese government bond yields and the yen fell, while the Nikkei share average rose, on growing market views that it would take longer than expected for the BOJ to raise rates.

“Everything’s been reduced in terms of their forecasts and the market seems to be selling the yen at the moment,” said Bart Wakabayashi, Tokyo branch manager at State Street.