Introduction
In a month where the Middle East conflict rumbled on without conclusion, there was one major economic change announced in mid-September. The Fed hiked interest rates by 0.25%, the first increase since 2023. Whilst the Bank of England held, the European and Japanese Central Banks also raised their rates.
Andy Burnham used his platform at the Labour Party Conference in Liverpool to announce some politically controversial policy changes.
Bond markets are increasingly nervy, and whilst political speeches and the forthcoming Autumn Statement are easy targets for blame, the long term global problem is increasing interest rates and competition over supply from capital markets who are now lending huge sums to AI companies, alongside ongoing fears of inflation from the Middle East conflict. On 1st October the yield on 30 year UK gilts hit 6% for the first time since 1998.
Neither the UK nor the US have run a surplus since 2001. Whilst this is a problem Chancellor John Healey has inherited rather than created, it creates more pressure on him ahead of the Autumn Statement to either raise more revenue through taxes, or cut spending, in order to appease bond markets.
UK
The Bank of England's Monetary Policy Committee (MPC) voted by six to three to hold the Bank Rate at 3.75%, the Bank announced on 17 September.
The Bank said conflict in the Middle East had pushed energy prices higher since its July forecast, with the spot prices of Brent crude oil and UK wholesale gas up 36% and 78% respectively. Inflation, as measured by the consumer prices index (CPI), rose to 3.1% in August. The Bank estimates that energy, mostly motor fuel, accounted for around 0.7 percentage points of the 1.1-point gap above its 2% target.
Governor Andrew Bailey commented: "So far, higher global energy costs have had a limited effect on price and wage setting in the UK. But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target."
Bank staff now expect CPI inflation to reach around 3.75% in the last three months of 2026, up from the 3.2% they forecast in July, and slightly above 4% early in 2027.
The three members who voted for a rise argued that the peak would coincide with next year's pay negotiations and raise the risk that higher prices feed into wages. The majority judged that a soft employment market and higher borrowing costs would hold inflation back for now.
The Bank said quoted rates on two-year fixed mortgages were around 0.95 percentage points higher than before the conflict began. Financial markets were pricing Bank Rate to peak at around 4.9% by the end of 2027, the minutes show, although most respondents to the Bank's survey of market participants in early September expected a prolonged hold.
The MPC announces its next decision on 5 November, a week after Chancellor John Healey's Autumn Statement.
Prime Minister, Andy Burnham, used his first Party Conference speech as Party leader to trail one major policy decision in advance of the Autumn Statement.
As you might expect at a party conference, the speech was more about vision than detail, but the one bit of detail that caught the attention of the media was a change to the state pension triple lock. The immediate press assertion that the triple lock was being removed is a little overstated, it is being tweaked rather than removed altogether. However, it is a politically dangerous move by the PM, who will be well aware of how any change will be used against him.
This will not change until 2030, after the next general election, should he win it. At this point it will instead track average earnings over time, rather than every year. This smooths out the impact of short term increases in average earnings, in what Burnham called an "adjusted triple lock".
The triple lock was introduced in April 2011, by the Tory-Lib Dem coalition government, to ensure the UK State Pension rises annually by the highest of inflation, average earnings growth, or 2.5%. Many economists now view this as unstainable, and unfair to younger generations who are supporting a growing ageing population through increasing taxation. The Institute for Fiscal Studies (IFS) has warned that by the 2070s, pension spending could rise by around £80 billion in today's money, with more than half of this increase attributed to the triple lock mechanism. They suggest that in a more volatile economic environment, the policy could cost an extra 1.5% of national income, roughly £44 billion in 2025 terms.
People approaching or in state pension age are a powerful voting block, and as a result most major parties will commit to retaining the triple lock for political reasons, regardless of the economic arguments.
The state pension will still be increased by the highest of three measures; inflation, average earnings growth over time, or 2.5%. It is impossible to know what difference this will make in future and any numbers quoted are based on the sort of economic assumptions that rarely make it into reality. Burnham asserted that this change is likely to save £15bn by 2040, but this is mostly guesswork for that very reason, and £15bn is a unlikely to fund his new National social Care Service alone, and could cost him his job.
United States
The Federal Reserve raised rates on 16 September. The committee voted unanimously for a 25 basis point increase to 3.75%–4.00%. It was the first hike since 2023, and Kevin Warsh described it as 'removing accommodation' rather than tightening policy. Warsh again submitted no projections of his own.
The hike followed a strong labour market report in August, in which employers added 162,000 jobs in August, and was followed by a steady report in September, which showed that whilst new jobs were down against August the unemployment rate stayed at 4.1%. Demographic trends in the US, most notably an ageing population and reduced net immigration, mean that fewer jobs need to be created to keep the employment rate stable. However, limited wage growth in an inflationary environment remains a threat to US consumption.
US equities were choppy in September but the bigger story was the bond market. The 30-year Treasury yield reached its highest level since 2002, while the 10-year yield was at its highest since 2007. Treasuries were on track for their worst September since 2023.
AI headlines added to the unease late in the month, with a leaked Anthropic IPO prospectus targeting a $2 trillion valuation whilst also suggesting AI posed 'existential risks to humanity'. Rival business, OpenAI, shelved its latest AI model due to safety concerns that emerged during internal testing.
The Strait of Hormuz remained the other dominant story, and the pause seen at the end of August did not hold. The US and Iran traded strikes in early September for the first time since July, and Brent oil prices remained volatile throughout the month.
The US mid term elections on 3rd November are a key moment for President Trump's legacy, and real pressure is on to put out some positive, believable news to the electorate by that date. The elections will determine the balance of power in Washington, with voters deciding who will control both the US House of Representatives and the US Senate.
US consumer confidence plunged to its second lowest recorded level in September, and creeping inflation and interest rate rises will eat into the pockets of employees and employers every day until the election. Trump's wild promise to pay $5000 to every US adult citizen if the Republicans win may be highly questionable, and potentially illegal, but it does speak directly to this concern.
Europe
The European Central Bank (ECB) raised rates on 10 September. The deposit rate rose 25 basis points to 2.50%, with the main refinancing rate at 2.65% and the marginal lending rate at 2.9%. This is the second hike of the cycle, following June's increase. Christine Lagarde said the Middle East conflict will keep headline inflation well above target for an extended period, while noting the euro area has been more resilient than expected.
The ECB did not pre-commit to further moves, but new inflation forecasts and the acknowledgement of economic strength convinced markets that more tightening is coming.
The data supported the move. The final August reading put euro area inflation at 3.2%, up from 2.9% in July (the flash estimate was 3.3%). Energy inflation reached 14.3%, its highest since January 2023, while core inflation eased to 2.4%. October's flash estimates for September puts Euro area annual inflation up to 3.8%.
There was positive news for Eurozone factory growth. S&P Global's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose for a third consecutive month to 52.9 in September from 52.7 in August. This is its highest level since May 2022.
Far East
The Bank of Japan joined the fiscal tightening. It raised its policy rate by 25 basis points to 1.25% on 18 September, the highest since 1995, in a 7–2 vote with two board members dissenting. September was the first month in which the Fed, ECB and BOJ all raised rates, and Bloomberg has reported the BOJ could hike again as early as October.
China's data was mixed. August retail sales grew just 0.4% year-on-year, below the 0.8% forecast, and fixed-asset investment for the year to date shrank 7.2%, deeper than the 6.7% fall to July. Property investment was down 19.9%. Auto sales fell 18.5%, which was the heaviest drag on consumption. Industrial production was the bright spot, at 5.2% against 4.8% expected, driven by high-tech manufacturing and exports.
Trade diplomacy provided some support. Xi Jinping's state visit to Washington on 24–26 September produced limited deliverables, including plans to cut tariffs on $30 billion of goods each way and an agreement that no country may impose tolls on international waterways. The two sides had already extended their trade truce, due to expire in November, to 10 January.
Emerging Markets
South Korea's tech heavy KOSPI index remained volatile and finished the month still well short of the peak above 9,000 in June. It finished the quarter as the worst performing equity market in the world, almost entirely due to its enormous reliance on chip stocks. Such is the volatility of these stocks, it is also around 60% up for the year, amongst the best performers globally.
Emerging market economies continue to produce divergent results dependent on their individual sensitivities to oil prices, chip stocks and the US dollar.
The El Niño risk flagged in July and August escalated. The National Oceanic and Atmospheric Administration's 10 September update put the chance of a very strong event this autumn and winter above 90%, and the chance of a historic event, stronger than any since 1950, at 75% for October to December. India's summer monsoon fell short, with rainfall 15% below average between 1 June and 9 September. Because the season is ending, the near-term hit may be limited, but the timing lag means the more pronounced effects are still to come, with implications for agriculture, commodity prices and the broader economy. Drought risk extends across South and Southeast Asia, Southern Africa and Australia.
Summary
September was the month that most key central banks blinked, and hiked rates in the face of creeping inflation. The Bank of England may have delayed rather than avoided the same course of action.
Prime Minister, Andy Burnham, has already addressed one key topic ahead of October's Autumn Statement. There is time for plenty more rumour and speculation before the 28 October, and global bond markets seem unwilling to give him much headroom.
President Trump also faces a major political reckoning in the November mid-terms, although he has more control over the economy than most. The Middle East crisis is becoming Donald Trump's crisis, and bringing it to a conclusion is politically, economically and reputationally important to him now.
And finally...
The first independent payment card company in the world was the Diners Club International, and the Diners Club card was the product of a mistake.
In 1949, Frank McNamara accidentally left his wallet behind when eating in a New York restaurant. His wife had to pay for dinner. It gave him an idea, so the story goes. He returned to that same restaurant, Major's Cabin Grill, the following year, with his business partner Ralph Schneider. This time he paid with a small piece of cardboard, which we now call the Diners Club card. By the mid-1960s, the card had become plastic and Diners Club had 1.3 million cardholders.
Sources
https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/september-2026
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https://edition.cnn.com/2026/10/02/economy/us-jobs-report-september-final
https://finance.yahoo.com/markets/currencies/articles/us-30-treasury-yield-approaches-143423856.html
https://edition.cnn.com/2026/09/25/economy/us-consumer-sentiment-final-september
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https://www.cpc.ncep.noaa.gov/products/analysis_monitoring/enso_advisory/ensodisc.shtml