020 7898 0500
The Federal Reserve raised interest rates overnight for the first time since 2023, lifting its rate above the Bank of England's.
The Federal Reserve raised interest rates last night for the first time in three years. All twelve policymakers backed it, despite weeks of President Trump demanding the opposite, and Kevin Warsh then spent his press conference hinting he might do it again. American interest rates are now marginally higher than Britain’s, for the first time this year, and the pound fell to five-week lows against the dollar.
Which leaves the Bank of England in an awkward position at noon today, because it is expected to do nothing at all. UK interest rates have not moved since December 2025, through five consecutive meetings, and few people expect that to change today. Yesterday’s inflation figures gave both camps what they wanted: headline prices at a five-month high, but the underlying measures the Bank watches most closely were unchanged, and the jobs market is still cooling.
What nobody disputes is what caused the problem, and it is not anything a central bank did. Petrol in Britain rose more in August than in nearly four years. Energy prices across the eurozone were up more than 14% on the year, which is why the European Central Bank raised rates last week for the second time since the Iran conflict began. The same shock, arriving at three different doors, has produced three central banks raising rates into economies that are not obviously strong enough to take it.
And the shock is already cracking. Oil fell sharply yesterday and drifted lower again overnight, after Washington said the damaged Saudi pipeline would be running again within days. Analysts who have looked at it think weeks rather than days, but if Washington is right, every decision taken this week was taken on a price that has since started falling.
So the interesting thing today is not the decision but the split behind it. Three members of the committee voted for higher rates in July, and whether a fourth joins them will say more about November than any line in the statement. The Bank of Japan, which is widely expected to raise rates tomorrow, is making the same bet on the same barrel of oil.
GBP: Three hawks and counting
Huw Pill, Megan Greene and Catherine Mann all wanted a rise to 4% in July, and most analysts expect the same three names and the same six-to-three split today. Policymakers also vote on how quickly to sell down the government bonds the Bank still holds, which matters more than usual when the government is already paying its highest borrowing costs in decades and the Chancellor has a Budget to write next month. The pound is soft against the dollar but holding up better than most other major currencies, which suggests the market's problem is with Washington rather than with Britain.
GBP/USD: the past year
EUR: Rising rates, falling currency
The euro is among the weakest of the major currencies even though its central bank has now raised rates twice, which is not how this is supposed to work. The problem is where the inflation is coming from: energy up more than 14% on the year while the cost of services fell to a four-month low, leaving policymakers raising rates against something they cannot influence. Final figures later this morning will confirm how much of August's jump came from abroad.
GBP/EUR: the past year
USD: October is off the table
The question is no longer whether the Fed moves again but when, and the answer is probably December. An October meeting falls weeks before the midterm elections, which makes another increase politically radioactive even for a chair who has just shown he will ignore the White House. Unemployment claims and housing figures this afternoon start filling in the gap.
USD/GBP: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
