Central bankers in the US, Japan and the UK face critical policy decisions this week as surging inflation raises the prospect of higher interest rates across three major economies.
Policymakers will set rates over the next seven days against a backdrop of turbulent global bond markets. In Washington, new Federal Reserve Chair Kevin Warsh must navigate pressure from President Donald Trump, who has repeatedly demanded rate cuts and posted on Truth Social that the US should maintain the "lowest rate of any country in the World" and urged Fed governors to "get smart — BE PATRIOTS for a change."
Warsh, appointed by Trump, told Congress that without continued progress toward the Fed's 2% inflation target, policymakers would have "work to do." Annual US inflation held at 3.4% in the latest reading, above the target for more than five years. Compounding the challenge, a barrel of crude oil surged past $100 last week for the first time since July as the US-Iran conflict escalated, the Strait of Hormuz remained largely closed to tanker traffic and Houthi rebels advanced along the Red Sea coast, threatening Saudi oil supplies. Prices eased slightly on Friday on hopes of renewed talks to reopen the waterway but stayed well above summer levels.
In London, Bank of England Governor Andrew Bailey struck a calm tone about above-target inflation, noting that rising mortgage rates are doing some of the work typically associated with a policy rate hike. Markets expect the Bank to hold rates at 3.75% on Thursday. However, three of nine Monetary Policy Committee members voted for a rate rise in July, and Friday's stronger-than-expected growth data heightened inflation concerns. Thomas Pugh, chief economist at RSM, said rising energy prices had "materially increased the chance" that the MPC will eventually raise rates, though he predicted a "hawkish hold" on Thursday with minutes likely signaling future tightening.
Financial markets now price in four UK rate rises over the next 12 months, up from three before the latest oil surge.
In Tokyo, the Bank of Japan is widely expected to raise its policy rate by a quarter point to 1.25% on Friday — the highest level in more than three decades, when Japan began its long fight against deflation. US Treasury Secretary Scott Bessent, whose department joined Japanese authorities in FX intervention to support the yen in July, signaled he expects the move. Speaking at Southern Methodist University, Bessent said he has "asymmetric information" about BoJ plans from his involvement in interventions.
The European Central Bank raised rates on Thursday. President Christine Lagarde said the Middle East conflict continues to generate inflation pressures and price growth will remain well above target for an extended period.
