WeekWatch

One but not done? First US rate hike in three years

It was a busy week for central bank watchers. First up was the US Federal Reserve’s rate-setting committee, the Federal Open Market Committee (FOMC), which on Wednesday voted unanimously to raise US interest rates by 0.25%. This was the first Fed hike in three years. Following this move, shares and bonds rose as investors reacted positively to the implicit message that under new chair Kevin Warsh, the Fed’s priority remains targeting inflation. 

Appointed by President Trump, Warsh took over in May 2026. Trump wanted a Fed chair who he hoped would be more amenable to lower interest rates than Warsh’s predecessor, Jerome Powell. Warsh voting for a rate hike demonstrated to financial markets he is not just a 'Trump proxy'. 

The next FOMC meeting on 27-28 October will be just a few days before the US mid-term elections. Unless the Iran war rapidly de-escalates and energy prices drop in the next few weeks, markets are factoring in a further 0.25% rate hike. 

The US economy is continuing to perform relatively strongly. Meanwhile the price of Brent crude, the international oil benchmark, has risen 10% over the past month in response to a flare-up of tensions between Saudi Arabia and Iranian-backed rebels in Yemen. Events over the next month, culminating in the FOMC’s October decision, may go a long way to deciding whether the honeymoon between the Fed and President Trump continues.   

Higher rates in Japan but the yen falls

The Bank of Japan’s (BOJ) move on Friday to raise interest rates by 0.25% had been expected by investors. At 1.25%, Japanese interest rates are now at their highest in 30 years. Yet instead of strengthening against the US dollar, the yen weakened. Why? While the rate increase was largely priced in, investors were disappointed with two dissenters voting against the hike (7-2) and a lack of guidance indicating that another rate hike was being considered. 

Even after the BOJ’s move, Japanese bond yields lag their western peers. While US 10-year Treasury yields recently passed 5%, equivalent Japanese government bonds (JGBs) are yielding around 3%. The yen 'carry trade', where investors borrow yen cheaply to invest in potentially high-yielding assets abroad, remains relatively attractive for many investors. 

Japan is the largest overseas holder of US Treasuries. If the yen remains weak, the BOJ may be forced to sell some of its dollar assets, primarily Treasuries, to support the currency. Such a move would put further upward pressure on US Treasury yields, something the US is keen to avoid. 

Japan’s weak currency is at least supportive for the export-focused Japanese stock market, as the country’s products become more competitively priced in other markets. The Nikkei 225 rose last week and year-to-date is up 25%, also helped by the market’s tech constituents. 

Bank of England halts long-bond sales

During the global financial crisis and the pandemic, the Bank of England (BoE) bought hundreds of billions of pounds of government bonds (gilts) through quantitative easing (QE). This approach was its effort to support the economy and keep borrowing costs low.  Since 2022, the BoE has been undertaking quantitative tightening (QT) to reverse this process. Last Thursday, alongside the decision to keep interest rates unchanged at 3.75%, the BoE announced a significant change in this process. 

Yields on 30-year gilts recently reached their highest level since 1998. The BoE has now decided to stop actively selling these long-dated gilts. It will instead allow them to mature. The Bank believes that cutting off the supply of these bonds being sold into the market should reduce the upward pressure on long-term borrowing costs, something which affects mortgage and bank borrowing rates. Investors regarded this decision as supportive for long-dated gilt yields (gilt yields and prices move in opposite directions), with yields falling after the announcement. 

US diesel prices at a record high

In the US, the diesel price of $6.29 per gallon is 76% higher than at the beginning of the year. The war in Iran and Ukrainian attacks on Russian refineries, resulting in a halt to exports of Russian diesel, are both to blame for the fuel shortage and record high prices. 

Diesel is a critical fuel, accounting for almost 30% of the world’s total oil consumption. The International Energy Agency’s (IEA) latest update notes that in the Middle East 2.2 million barrels per day of refining capacity remain offline due to war damage. This compares with daily exports of 3.3 million barrels of refined oil products before the war. In Russia, refinery output is at its lowest level in 20 years. 

While refineries in other regions such as the US, China and other parts of Asia have increased output, these have been unable to offset the combined 75% decline in exports from Russia and the Middle East in August compared with last year.   

More pensioners to pay tax following boost to state pension

Higher numbers of pensioners are likely to be pulled into the income tax net when the state pension rises in April next year.

Last week it was revealed that national average wages rose by 3.9% in the three months from May to July 2026.¹ UK state pensions will now rise by this amount in April 2027.

This is because of the state pension 'triple lock'. The triple lock guarantees that the state pension will rise each year by the highest of inflation or average earnings, (both as recorded in September each year) or 2.5%.

As inflation was recorded at 3.1% this month, it means the state pension will now rise by the average earnings figure of 3.9% next April. This will be close to a £490 uplift on the full annual state pension, which is currently worth around £12,540 (based on a state pension of £241.30 per week).

But it means many pensioners whose only income source is the state pension will become liable to pay income tax.

Former Chancellor Rachel Reeves had previously stated that she wanted to keep the state pension free from income tax. This may increase pressure on the current Chancellor, John Healey, to raise the personal allowance for pensioners. The personal allowance is currently £12,570. This is the amount of income you can earn in a tax year before paying income tax.

ISA subscriptions soar in 2024/25 tax year

Subscriptions into tax-efficient individual savings accounts (ISAs) reached record high levels in the 2024/25 tax year, according to HM Revenue and Customs' (HMRC) latest figures.²

HMRC said the growth was largely driven by an increase in stocks and shares ISA subscriptions.

There were subscriptions into 16.8 million adult ISAs  in 2024/25, compared to 15 million in the previous tax year. Of these accounts, 10.71 million were cash ISAs (up from 9.94 million in 2023/24), 4.89 million were stocks and shares ISAs (up from 4.09 million in 2023/24), and 1.14 million were lifetime ISAs (up from 960,000 in 2023/24). A small number were innovative finance ISAs.

More than £135 billion was saved or invested in adult ISAs in the 2024/25 tax year, an increase of £32.7 billion compared to 2023/24.

This includes £95.6 billion in cash ISAs and £37.2 billion in stocks and shares ISAs.

Sources
¹Office for National Statistics. Average weekly earnings in Great Britain - September 2026
²HMRC, Annual savings statistics – September 2026