This article is more than 1 month old
Iran war and turbulent global bond markets add to pressure as rate decisions loom this week in major western economies
Economics viewpoint: perilous UK inflation revives the likelihood of higher interest rates.
Over the next seven days, policymakers in all three nations will determine rates amid volatile global bond markets.
Investors will be watching closely to see whether Kevin Warsh, the newly appointed chair of the U.S. Federal Reserve, can resist Donald Trump’s calls for cuts and instead convince Fed governors to raise rates on Wednesday.
Warsh was selected by the president, who has repeatedly urged lower rates. In a Truth Social post this month, Trump claimed the U.S. should have the “LOWEST RATE of any country in the World”.
He added: “The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change.”
The Fed’s board, however, must also grapple with a fresh surge in oil prices after the U.S.–Iran conflict flared again.
Crude prices jumped above $100 a barrel last week for the first time since July, as the Strait of Hormuz was effectively closed to tankers and Houthi rebels moved along the Red Sea coast, threatening Saudi oil shipments.
Oil eased slightly on Friday on hopes of new talks to reopen the waterway, but prices stayed well above summer levels when Middle‑East fighting had temporarily eased.
Higher energy costs are expected to push U.S. inflation higher, keeping it above the Fed’s 2 % target for more than five years. In a speech this month, Warsh said that without continued progress toward the goal, Fed policymakers would have “work to do”. Data released on Friday showed annual U.S. inflation unchanged at 3.4 %.
Bank of England governor Andrew Bailey took a measured tone on the UK’s above‑target inflation, noting that rising mortgage rates have already done part of the work of a rate hike without direct Bank action. Markets and economists expect the Bank to keep rates at 3.75 % on Thursday.
Nevertheless, three of the nine members of the Bank’s Monetary Policy Committee voted for a rate increase in July, and Friday’s stronger‑than‑expected growth data could heighten inflation concerns.
Thomas Pugh, chief economist at consultancy RSM, said the latest energy‑price rise had “materially increased the chance that the MPC will eventually follow other major central banks and raise rates”.
He forecast a “hawkish hold” from the Bank when the MPC meets on Thursday: rates would stay unchanged, but the minutes would signal possible future hikes.
Financial markets are now pricing in four UK rate rises over the next 12 months, up from three before the recent oil‑price surge.
In Tokyo, Bank of Japan policymakers will announce their decision on Friday and are widely expected to raise interest rates, supporting the yen’s recent recovery in foreign exchange markets.
A quarter‑point hike to 1.25 % would bring the BoJ’s policy rate to a level not seen in more than three decades, since Japan began its long fight against deflation.
The U.S. Treasury joined Japanese authorities in foreign‑exchange intervention to back the yen in July, and Treasury Secretary Scott Bessent has signaled that he expects rates to rise.
Speaking at Southern Methodist University in Texas on Tuesday, Bessent said: “When we intervene with the Japanese yen, I have pretty good insight into what the Bank of Japan is going to do, what Japanese policymakers are going to do. I have asymmetric information. I am the house now. You can bet against me if you want.”
The European Central Bank raised interest rates on Thursday. Christine Lagarde, its president, said: “The conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.”
