Central banks remain on alert for the repercussions of the energy shock

Intensive central bank meetings dominated global market movements, as policymakers tightened their stance in response to inflationary pressures driven by rising energy prices.

According to the weekly money market report issued by National Bank of Kuwait, the Federal Reserve raised interest rates for the first time in over three years to a range of 3.75% to 4.00%, signaling the possibility of another hike before the end of the year.

The decision was supported by consumer price index readings that exceeded expectations, with the core index rising by 0.3% month-on-month, compared to forecasts of a 0.2% increase, underscoring persistent inflationary pressures.

The Bank of Japan followed the Federal Reserve’s lead, raising its interest rate to 1.25% in a split decision, while the Bank of England kept rates unchanged at 3.75%. However, three members of the Monetary Policy Committee again favored a rate hike, as UK inflation accelerated to a five-month high of 3.1%, driven by rising fuel costs.

The widening divergence in monetary policy stances bolstered the US dollar, pushing the euro below 1.15 against it and sending the British pound to its lowest level since late July. The US Dollar Index remained stable near the 100-point mark.

Oil prices retreated from their highs as Saudi Arabia redirected its exports amid repairs to the East-West pipeline, yet Brent crude remained above $100 per barrel, with actual market conditions characterized by tight supplies.

In Asia, Japanese exports continued their upward trajectory, supported by strong demand for semiconductors, while China’s retail sales growth slowed to 0.4%, reflecting ongoing weakness in household consumption.

The Federal Open Market Committee voted unanimously, 12-0, on September 16, to raise the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, marking the first increase in over three years. The Federal Reserve, chaired by Jerome Powell, indicated the likelihood of another rate hike before year-end.

This consensus holds particular significance following the July meeting, when three members opposed the decision to hold rates steady and advocated for a quarter-point increase.

The committee’s statement clarified that inflation remains elevated and that the decision would help bring it back to the 2% target at a faster pace. It also noted that economic activity continues to grow strongly, supported by resilient domestic spending, robust productivity growth, solid capital investment, and largely stable unemployment rates, despite ongoing uncertainty stemming from geopolitical developments.

In the longer term, Fed Committee members’ forecasts for 2027 were divided: eight members expected another interest rate hike, six favored holding rates steady, and four anticipated a cut. Markets had begun pricing in higher interest rates well before the decision, with 10-year Treasury yields rising by approximately 25 basis points since Kevin Warsh’s comments at Jackson Hole on August 28, and by a full percentage point compared to their February lows. Two-year yields saw an even larger increase. Treasury yields fell following the announcement, suggesting investors were reassured by the Federal Reserve’s seriousness in tackling inflation.

US retail sales rose 1.2 percent month-on-month in August 2026, marking the strongest increase in five months and significantly surpassing expectations of 0.8 percent, after July’s decline was revised to 0.5 percent.

The recovery was broad-based, led by gas stations, where sales jumped 3.1 percent, followed by non-store retailers with a 2.6 percent increase. Sales also rose in electronics, restaurants, sporting goods, furniture, and clothing.

Home improvement and garden equipment stores were the only major category to record a decline. More importantly, core retail sales, which are used in calculating GDP, surged 1.4 percent, far exceeding the 0.4 percent forecast, indicating resilient consumer spending and strong underlying consumption momentum in August.

The Bank of England kept its main interest rate unchanged at 3.75 percent on September 17, with six members voting to hold steady against three who favored a hike to 4 percent, amid UK inflation rising to 3.1 percent. The split mirrored the July meeting, when Hugh Pill, Megan Green, and Catherine Mann voted for a rate increase, driven by concerns that rising energy prices could entrench more persistent inflationary pressures.

The Bank clarified that global energy cost increases had so far had a limited impact on pricing and wage mechanisms in the UK, but warned that prolonged volatility could increase the likelihood of needing to raise interest rates to bring inflation back to the 2 percent target.

This tone marked a shift from the Bank’s stance earlier in the month, when Governor Andrew Bailey told MPs on September 8 that there was no hidden plan to raise interest rates. The Bank of England had cut rates six times between August 2024 and December 2025, reducing them from 5.25 percent to 3.75 percent, before holding them steady for six consecutive meetings.

Markets now price in a greater than 50 percent probability of a rate hike during the November or December meetings, with the next decision due on November 5.

UK annual inflation rose to 3.1 percent in August 2026, up from 2.9 percent in July, reaching a five-month high and aligning with market expectations. The increase was primarily driven by transport costs, as inflation in this sector accelerated to 4.6 percent due to sharp rises in petrol and diesel prices, pushing motor fuel inflation to 23.0 percent.

Inflation accelerated in the housing, household services, telecommunications, entertainment, and culture sectors, while food price inflation remained steady at 1.3 percent. Core inflation held at 2.6 percent, with goods inflation rising to 2.7 percent and services inflation unchanged at 3.4 percent. On a monthly basis, consumer prices rose by 0.5 percent, marking the strongest increase in four months and aligning with expectations.

Japan’s exports surged 19.3 percent year-on-year in August, slowing from July’s 23.2 percent growth but exceeding market forecasts of 18.4 percent, marking the twelfth consecutive month of growth.

Exports of electronic components, including semiconductors, jumped 52 percent year-on-year, bolstered by strong demand from China, where shipments more than doubled. Meanwhile, exports of semiconductor manufacturing equipment to the United States and the European Union rose by more than 100 percent.

Exports to the United States, China, and Europe increased by 24.9 percent, 20.6 percent, and 11 percent, respectively. Imports grew 28 percent year-on-year, surpassing expectations of 26.3 percent, widening the unadjusted trade deficit to 1.1 trillion yen, compared to a seasonally adjusted 638.3 billion yen in July.

The value of crude oil imports rose 59 percent year-on-year, while the average yen-dollar exchange rate in August stood at 160.64 (down 8.7 percent year-on-year), contributing to higher import costs.

The Bank of Japan (BOJ) raised its short-term interest rate by 25 basis points to 1.25 percent from 1.00 percent last Friday, in line with expectations. However, two policy board members, Toichiro Asada and Ayano Sato, dissented, with seven members supporting the decision against two.

The decision came amid growing inflation risks facing the BOJ, alongside unusually explicit calls from Washington to continue normalizing monetary policy.

In its statement, the bank noted that core inflation is approaching 2 percent, pledging to continue raising interest rates in response to economic, price, and financial developments, while balancing the timing and pace of any further moves against the realization of its baseline forecast scenario.

It pointed out that real interest rates remain low, corporate demand for financing has risen, and lending trends remain supportive. It also deemed it appropriate to reduce the degree of monetary easing to sustainably achieve the 2 percent inflation target, anticipating that accommodative financial conditions will persist following the decision. The base lending rate is scheduled to be raised to 1.5 percent, with the new guidelines taking effect on September 24.