Surging inflation puts interest rates back in focus as policymakers meet in Japan, US and UK
Central banks in the US, UK and Japan are all facing pressure to raise interest rates this week as inflation surges, driven partly by an intensifying US-Iran conflict pushing oil prices above $100 a barrel. The decisions matter because they will test whether Kevin Warsh, Donald Trump's handpicked new Federal Reserve chair, can resist presidential demands for rate cuts and instead push through a rise, while also signalling how seriously policymakers in London and Tokyo are treating renewed inflationary pressures.
The Fed decides on Wednesday, with US inflation stuck at 3.4% and above target for over five years, while Trump has publicly demanded the "lowest rate of any country in the world". The Bank of England meets on Thursday and is expected to hold rates at 3.75%, though three of nine MPC members backed a rise in July and markets now expect four UK rate rises over the next year, up from three previously. The Bank of Japan announces on Friday and is widely tipped to raise its policy rate by a quarter-point to 1.25%, its highest in over 30 years, a move Treasury secretary Scott Bessent has suggested he anticipates.
- Fed, Bank of England and Bank of Japan all set rates within a week
- Oil above $100 a barrel is fuelling fresh inflation fears
- BoE expected to hold at 3.75%; BoJ tipped to raise to 1.25%
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Central banks rarely all move in the same week, but that is what is expected to happen as the US Federal Reserve, the Bank of England and the Bank of Japan each hold policy meetings within days of one another. The backdrop is a fresh bout of inflation, partly linked to conflict between the US and Iran pushing oil above $100 a barrel, which has revived pressure on interest rates after a period when many expected them to keep falling.
The Fed's decision is being closely watched because its new chair, Kevin Warsh, was chosen by President Trump, who has openly called for lower rates, so any move to raise them instead would be seen as a test of the Fed's independence. The Bank of England, which sets UK borrowing costs, has already seen some of its own rate-setters push for an increase, while the Bank of Japan is expected to raise its rate to its highest level in three decades.
These decisions matter beyond financial markets because interest rates affect the cost of mortgages, loans and savings for ordinary households, as well as government borrowing costs, in all three economies.
Both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Advocates of raising rates argue that inflation has been above target for more than five years and cannot be allowed to become entrenched, especially with oil prices now pushing past $100 a barrel on the back of the US-Iran conflict. They see central bank independence as essential: if policymakers bow to political pressure and cut rates while inflation is surging, they risk a 1970s-style wage-price spiral and a lasting loss of credibility that could ultimately force much harsher, more painful tightening later. Acting decisively now, they argue, protects savers, pensioners and anyone on a fixed income from the corrosive effects of high inflation, and reassures bond markets that the central bank will not be captured by short-term political demands.
The case against
Those wary of raising rates, or who favour holding or cutting them, argue that the current inflation spike is substantially a supply-side oil shock driven by geopolitical conflict, not by domestic demand, and that raising borrowing costs will do little to bring down oil prices while adding real pain through higher mortgage and business lending costs. They point to households and firms already squeezed by a cost-of-living crisis, and argue that overtightening into an external shock risks tipping fragile economies into unnecessary recession and job losses. From this perspective, supporting growth and easing the burden on borrowers is a legitimate and responsible priority, and caution about further rate rises reflects sound judgement about where the greater economic risk currently lies, rather than simply political interference.
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