The key facts

  • The Fed raised its rate to 3.75–4%, the ECB raised its deposit rate to 2.5%, the Bank of Japan to ~1.25%; the Bank of England held at 3.75% by a 6:3 vote.
  • Inflation in the US accelerated to 3.7% in September, in the eurozone to 3.8%; in the UK it was 3.1% in August.
  • Hugh Dixon allows for recessions in several G7 economies by 2027 and UK inflation rising to 4% by the end of the year.

Energy shock changes inflation expectations

Rising energy prices, linked to the conflict around Iran, are again intensifying inflationary pressure in major economies and complicating central banks' task of containing prices without undermining growth. In September, the Fed, the ECB and the Bank of Japan raised rates, while the Bank of England kept the base rate unchanged despite growing concern about the inflation outlook. Hugh Dixon, emeritus professor of economics at Cardiff University, noted in a comment to Anadolu that the energy crisis has significantly changed expectations for inflation and monetary policy since the beginning of the year. He warned that growth could stall by 2027 and that recessions are likely in several G7 economies. In his words, rates will have to be raised to control inflation, but they may remain below inflation itself in order to limit damage to the real economy. Dixon also believes that central banks will not repeat the shift to zero rates seen in the 2008 crisis unless a conflict with Russia occurs.

US: inflation accelerates, Fed raises rate

Annual consumer inflation in the US rose to 3.7% in September from 3.4% in August, according to the Bureau of Labor Statistics. Prices increased 0.6% over the month, with a 9.1% jump in gasoline prices accounting for more than half of the increase. Core inflation accelerated to 2.6% from 2.4%. Energy prices rose 20.4% over the year, gasoline 34.2%, and fuel oil 74.2%. Pressure extended beyond energy: housing costs rose 0.4% over the month, and recreation, used cars, education and air fares also became more expensive. On September 16, the Fed unanimously raised the target rate range by 25 basis points to 3.75–4%, noting that inflation remains elevated and that the step will support a more timely return to the 2% target. At the same time, the regulator assessed economic activity as relatively resilient, pointing to solid domestic spending, strong productivity growth and active capital investment.

Eurozone: ECB warns of prolonged overshooting of target

Annual inflation in the eurozone accelerated in September, according to a preliminary Eurostat estimate, to 3.8% from 3.2% in August. Energy inflation jumped to 18.8% from 14.3%, services inflation to 3.2% from 3%, and the measure excluding energy, food, alcohol and tobacco rose to 2.5% from 2.4%. On September 10, the ECB raised its three key rates by 25 basis points, bringing the deposit rate to 2.5%. The regulator warned that the Middle East conflict creates inflationary pressure that will keep price growth significantly above target for a long time. The ECB's September projections assume average inflation of 3% in 2026, 2.5% in 2027 and 2.1% in 2028 — the last two figures revised upward compared with June. At the same time, the ECB forecasts GDP growth of 0.9% this year and 1.4% next year, which distinguishes its baseline scenario from Dixon's warning about possible recessions. The ECB sees inflation risks to the upside and growth risks to the downside, and makes no commitments on a specific rate path.

UK: Bank of England holds rate, but forecasts rise

The Bank of England on September 17 kept the base rate at 3.75% by a 6:3 vote — three committee members voted for an increase to 4%. Inflation in the UK was 3.1% in August. According to the updated assessment, inflation could reach about 3.75% in the fourth quarter, versus the 3.2% forecast in July, and slightly above 4% in early 2027. Committee members noted that there is as yet little evidence of a significant pass-through of energy costs into wages and price-setting, but that the risk will grow the longer high energy prices persist. Dixon recalled that before the US and Israeli attack on Iran, UK inflation had been expected to fall to 2% by April and rates to a range of 3–3.5%. He now expects inflation of 4% by the end of the year and possible further growth in 2027 if the war resumes. 'Bank of England rates will rise,' he said, describing a similar shift in forecasts for Western Europe and the US. The September minutes noted that survey respondents expect a prolonged period of unchanged rates, whereas market pricing points upward. Policymakers warned that risk premiums partly explain the market curve, meaning it does not simply reflect expectations of future decisions. Elevated market borrowing costs are already affecting households: quoted two-year fixed mortgage rates are roughly 95 basis points above the pre-war level.

Japan: rate hike despite low headline inflation

Annual inflation in Japan was 1.9% in August, and 1.7% excluding fresh food, according to the Statistics Bureau. Nevertheless, the Bank of Japan on September 18 voted 7:2 to raise the target level for its overnight rate to approximately 1.25%. The regulator cited rising medium- and long-term inflation expectations and the risk that underlying inflation will exceed the 2% target, as companies increasingly pass on wage and cost increases into output prices. High oil prices, a weakening yen and demand for products related to artificial intelligence were also named as sources of price pressure. The Bank expects inflation excluding fresh food to noticeably exceed 2% in the second half of fiscal 2026, and signaled further rate increases depending on economic and price developments. Dixon warned that prolonged uncertainty could undermine confidence in central banks' ability to maintain price stability: 'Expectations have remained anchored in recent years, but there is so much uncertainty that I suspect this could break down if central banks again allow inflation to get out of control.'