The Federal Reserve, Bank of England and Bank of Japan all met last week as higher energy prices added to inflation risks across major economies.
The Federal Reserve, Bank of England and Bank of Japan all made important policy decisions last week. Their moves were different, but inflation remained a common concern.
The Federal Reserve raised interest rates for the first time since 2023. The Bank of England kept rates unchanged but warned that prolonged energy price pressure could require another increase. The Bank of Japan also raised rates and said it remained prepared to tighten policy further.
Financial markets did not see a major sell-off after the decisions. US shares ended the week slightly higher, while the 10-year US Treasury yield moved around the 5% level. UK gilt yields also remained close to recent highs.
The main question for investors is now how long energy prices will remain elevated and how central banks respond if the pressure feeds into wider inflation.
Fed raises rates as inflation stays above target
The Federal Reserve raised its benchmark interest rate by 0.25 percentage points on September 16, taking the target range to 3.75%–4.00%.
The decision was unanimous.
The Fed said economic activity was expanding at a solid pace, while inflation remained elevated. It said the latest move would support a timelier return of inflation to its 2% target.
The Fed’s September economic projections also pointed to another increase later this year. The median projection for the federal funds rate at the end of 2026 was 4.1%, above the current midpoint of 3.875%.
Inflation is still well above the Fed’s target. The central bank’s projections put personal consumption expenditures inflation at 3.7% for 2026, before falling to 2.3% in 2027.
That leaves policymakers watching energy prices, domestic demand and other sources of price pressure closely.
Fed Chair Kevin Warsh said inflation remained too high and stressed the need for clearer progress towards the central bank’s target.
The latest decision also changes the direction of US monetary policy. After a period of rate reductions, the Fed is now tightening again as inflation proves more persistent than policymakers had hoped.
Bank of England keeps rate at 3.75%
The Bank of England took a different approach.
Its Monetary Policy Committee voted 6–3 to keep Bank Rate at 3.75% at its September meeting. Three members wanted a 0.25 percentage-point increase to 4%.
The Bank said higher global energy prices had pushed up household fuel and utility costs. It also warned that the longer energy prices remain volatile, the greater the risk that inflation becomes more persistent.
UK inflation rose to 3.1% in August from 2.9% in July, according to the Office for National Statistics. Transport, particularly motor fuels, made the largest upward contribution to the monthly change.
Core CPIH inflation was 2.9% in August, unchanged from July. Services inflation also remained at 3.6% on the CPIH measure.
The Bank expects inflation to rise further because of higher energy prices. It expects inflation to move above 4% in early 2027 before falling back as the energy shock fades.
The Bank’s September Market Participants Survey shows that most respondents expected Bank Rate to remain at 3.75% after the November meeting. The median expectation was also 3.75% one year ahead, although the 75th percentile reached 4%.
That suggests markets are not uniformly expecting a rapid series of rate increases. The path will depend heavily on how long the current energy shock lasts.
The Bank also confirmed plans to continue reducing its holdings of UK government bonds. It will maintain £20 billion of annual gilt sales alongside maturities as part of its longer-term balance-sheet reduction.
BOJ raises rates to 1.25%
The Bank of Japan increased its policy rate by 0.25 percentage points to 1.25% on September 18.
It was the highest Japanese interest rate in 31 years.
The decision was not unanimous. Seven board members supported the increase, while two preferred to leave the rate unchanged.
The move came as Japanese policymakers continued to respond to inflation pressures. The BOJ has been gradually moving away from the ultra-low interest-rate policies that defined much of the previous decade.
The yen weakened after the decision, despite the rate increase. That reflected uncertainty about the pace of future tightening and showed that currency markets were looking beyond the headline move.
The BOJ has not committed to a fixed schedule for future increases. Its decisions will continue to depend on inflation, wages, economic activity and financial conditions.
Energy prices remain the main inflation risk
The common factor behind the three central-bank decisions is the renewed pressure from energy markets.
The International Energy Agency said in its September Oil Market Report that Middle East supply disruptions had tightened oil markets sharply.
Global oil production fell by 1.6 million barrels per day in August. More than 10 million barrels per day of Gulf production remained shut in because of security risks, according to the IEA.
The agency said global observed oil inventories fell by another 95 million barrels in August. Cumulative inventory draws since February reached 507 million barrels.
Refined products have also come under pressure. The IEA said diesel and gasoil markets were particularly tight, with US prices for those products rising sharply in September. Disruptions to Gulf exports and Russian refining have added to the shortage.
The energy shock creates a difficult problem for central banks.
Higher oil, diesel and gas prices can push headline inflation higher quickly. If businesses then pass higher transport, energy and production costs into other prices, the pressure can become broader and last longer.
The Bank of England has already highlighted this risk. The Federal Reserve has also raised its inflation projections as energy prices have increased.
At the same time, higher energy costs can reduce household spending and business activity. That makes the policy response more complicated than simply looking at the inflation rate.
Markets turn to the next round of data
Investors now have several indicators to watch.
US and European business surveys due this week should provide a fresh reading on economic activity. Markets will also be watching energy prices and government bond yields for signs that inflation expectations are changing.
The planned meeting between US President Donald Trump and Chinese President Xi Jinping is another event that could affect markets, particularly if the talks produce developments on trade or energy.
For central banks, however, the immediate focus remains inflation.
The Fed has already moved back towards higher rates. The Bank of England is keeping its options open, while the Bank of Japan is continuing its gradual tightening cycle.
The direction of energy prices over the coming weeks could determine how much further each central bank needs to go.
