Fed less inclined to raise interest rates early as US inflation expectations decline

A recent survey has shown that the Bank of Japan will not meet its target 2% inflation rate by next year due to the effect of the sales tax hike imposed by the Shinzō Abe in a bid to boost inflation. The level of taxation went up from 5% to 8% and is scheduled to rise to 10% in October 2015. Recent data has shown that production in the Japanese economy has eased (Revised Industrial Production m/m, Actual: -1.9%, Forecast: -1.5%, Previous: -1.5%, 15/10/2014) indicating that growth will also fall. The decision whether to implement a further hike next year will be made in December 2014. It is likely to go through even though current conditions suggest that a sales tax hike could damage the recovery substantially. Another reason the target is not likely to be met is low commodity prices such as oil and because of this it is expected that more easing will be necessary in the coming months. Nevertheless, the BoJ remain optimistic about the current recovery although with the current global slowdown, inflation and growth are likely to stay low.
Along with the global slowdown the UK economy has also slowed (Actual: 0.7%, Forecast: 0.7%, Previous: 0.9%, 24/10/2014). However, the UK still remains above its G7 counterparts in terms of growth. Weak wage growth is one of the major concerns the Bank of England is facing. Wages are currently below inflation and therefore consumers have less purchasing power affecting consumption. The other major concern the BoE is facing is the stagnant Eurozone and a lack of demand for UK goods from the Eurozone due to weak inflation and growth could hurt the UK export market substantially. The BoE is not expected to raise interest rates anytime soon and not until wages pick up and the Eurozone’s situation improves significantly.