Central banks lean toward higher rates as energy costs and AI investment push up inflation

Centre · 1The US Federal Reserve, the European Central Bank and the Bank of Japan raised borrowing costs in September, while the Bank of England held its benchmark rate steady despite growing concern about the inflation outlook. 1 Centre · 1Anadolu Agency attributes the renewed inflation pressure to rising energy costs from the Iran war. It quotes Huw Dixon, emeritus professor of economics at Cardiff University, as saying the energy crisis had substantially changed expectations for inflation and monetary policy since the start of the year. 1 Centre · 1US annual consumer inflation rose to 3.7% in September from 3.4% in August, with a 9.1% jump in gasoline prices accounting for more than half of the 0.6% monthly rise. Energy prices were 20.4% higher than a year earlier, and core inflation accelerated to 2.6% from 2.4%. 1

Centre · 1The Fed raised its target range by 25 basis points to 3.75%-4% on 16 September in a unanimous decision. The ECB raised its three key rates by 25 basis points on 10 September, taking its deposit rate to 2.5%, and said the Middle East conflict was generating inflation pressures likely to keep price growth well above target for an extended period. Euro-area inflation was estimated at 3.8% in September. 1 Centre · 1The ECB's September projections put inflation at 3% in 2026, 2.5% in 2027 and 2.1% in 2028, and still projected growth of 0.9% this year and 1.4% next year. Dixon, by contrast, warned that growth could stall heading into 2027, with recessions probable in several G7 economies. 1 Centre · 1The Bank of England held at 3.75% on 17 September by a 6-3 vote, with three members favouring a rise to 4%. UK inflation was 3.1% in August, and the bank judged it could reach around 3.75% in the fourth quarter. Dixon said he expects Bank of England rates to rise. 1

Centre · 1The Bank of Japan raised its policy-rate target to around 1.25% on 18 September by a 7-2 vote. It cited rising inflation expectations, and named high crude oil prices, yen depreciation and demand for AI-related products as sources of price pressure. 1 Centre · 1CNA, reporting from the IMF and World Bank annual meetings in Bangkok, frames the pressure differently, with the artificial intelligence boom setting off a global race for money that could keep interest rates higher. Fed Chair Kevin Warsh said central bankers must recognise the boom as a shock that is hitting the demand side of the economy before the supply side, and warned the transition could be very bumpy. 2 Centre · 1ECB policymaker Martins Kazaks said AI investment is one of the key factors driving up the cost of money. Bank of England Chief Economist Huw Pill said rates may on average be a little higher, and South African Reserve Bank Governor Lesetja Kganyago said R-star, the neutral rate, is higher but it is not known by how much. 2

Centre · 1CNA reports that economists expect the Bank of England to raise rates at its meeting on 5 November, and that markets have priced in another move by the ECB and the Fed in December. Sovereign bond yields have risen worldwide, some to levels not seen since before the global financial crisis, and the euro zone, notably France, is seen as particularly exposed. 2 Centre · 1CNA also notes that the euro bloc faces higher energy costs from wars in Iran and Ukraine, which compound inflation and squeeze public finances. ECB President Christine Lagarde said France's situation is primarily a matter for domestic fiscal policy. 2