Japan delays sales tax hike, BoE and Fed in no mood to lift rates

Source: Dukascopy Bank SA
The main topic of the previous week appeared to be the sales tax hike delay in Japan. Being convinced by Paul Krugman, the Nobel laureate, Abe decided to delay for 18 months a second sales tax hike from the current 8% to 10% after the first lift in April led the economy shrank for two consecutive quarters. Preliminary data showed GDP of the world's third largest economy shrank 0.4% in the July-September quarter, coming in much worse than the 0.5% growth rate expected by economists. Nevertheless, the recession did not mean Abenomics, the policy of unprecedented monetary easing, stimulus spending and structural reform, was a failure, Abe noted. Abe pledged that the sales tax rise, required to fund swelling social security costs and curtail Japan's massive public debt, would be implemented without fail in April 2017. Abe, who is serving his second term as prime minister after a difficult 2006-2007 term, inherited the sales tax plan from his predecessor based on a ruling-opposition party agreement, in which he played no direct part. In the meantime, despite the recent downbeat data, the Bank of Japan decided to keep its monetary policy and its optimistic economic outlook unchanged, allowing some time to assess the effect of its unexpected easing last month.
Meanwhile, in the UK, BoE Governor Mark Carney and the Chief Economist, Andy Haldane, indicated that low inflation is the most serious problem  facing the economy  and they watch closely downside risks to inflation as the central bank emphasizes the reasons for keeping monetary policy loose. Carney highlighted that there were massive disinflationary forces coming from the UK's trading partners, as well as commodity prices, which have dropped quite sharply. The comments of the officials, as well as quarterly Inflation Report released last week, intended to reinforce the view that the BoE was in no mood to lift interest rates in the foreseeable future. Market participants now expect policy makers to increase rates as soon as October 2015. Nevertheless, the BoE policy makers remain split on interest rate hike for the fourth months in a row, with two officials voting for an immediate rate increase, the November MPC minutes showed.
The BoE is not the only central bank concerned about low inflation and that relies its monetary policy decision on consumer prices. The subdued pace of inflation is replacing jobless rate as the main reason the Fed is not ready to begin hiking interest rates, minutes of the latest FOMC meeting showed. Thus, the Fed plans to keep short-term interest rates near zero for a considerable period. The central bank is likely to start raising rate in the mid-2015.
In Europe, the ECB is considering various measures to combat persistently low inflation and lackluster growth in the 18-member zone. One of potential tools might be the US-style quantative easing, hinted central bank's Governor Mario Draghi. However, Klaas Knot, the Dutch Central Bank President questioned the effectiveness of additional QE steps from the ECB, which may also include purchases of government bonds. Knot said that it is not certain whether such measures would help fight stubbornly low inflation in the currency bloc.

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