Surging inflation puts rates back in focus before decisions in US, Japan and UK

Central banks in the US, Japan and the UK will set interest rates this week as higher energy costs add to inflation risks. The Federal Reserve is due to act on Wednesday, the Bank of England on Thursday and the Bank of Japan on Friday.

Investors are focused on new Federal Reserve chair Kevin Warsh. President Donald Trump has urged lower borrowing costs, but the Fed may face pressure to tighten policy: the latest US data put annual inflation at 3.4%, above the 2% target for more than five years.

Oil prices raise US inflation risks

Crude prices rose above $100 a barrel last week for the first time since July. The increase followed renewed conflict involving the US and Iran, the near-closure of the Strait of Hormuz to tanker traffic and threats to Saudi oil supplies as Houthi forces advanced along the Red Sea coast.

Prices eased on Friday amid hopes of talks to reopen the waterway, but remained well above summer levels. Higher energy costs are expected to put further pressure on US inflation.

Bank of England may hold a hawkish stance

Markets and economists expect the Bank of England to keep its rate at 3.75% on Thursday. Governor Andrew Bailey has said higher mortgage costs have already done some of the work of a rate increase without further action by the bank.

However, three of the nine Monetary Policy Committee members voted for a rise in July, while stronger-than-expected economic growth could intensify inflation concerns. RSM chief economist Thomas Pugh said the energy-price increase had materially raised the chance of a future rate rise; markets are now pricing four UK increases over the next 12 months.

Bank of Japan expected to raise rates

The Bank of Japan is widely expected to raise rates on Friday, potentially supporting the yen’s recent recovery. A quarter-point increase to 1.25% would take the policy rate to a level not seen for more than 30 years.

The US Treasury and Japanese authorities intervened in foreign-exchange markets in July to support the yen. Treasury Secretary Scott Bessent has said he expects Japanese rates to rise.

The European Central Bank raised rates on Thursday. President Christine Lagarde said the Middle East conflict continued to generate inflationary pressure and that inflation would remain well above target for an extended period.