September was another month shaped by central banks, inflation and bond markets. The US Federal Reserve raised interest rates for the first time under Chairman Kevin Warsh, while the Bank of England held Bank Rate at 3.75% despite three members voting for an increase. UK CPI inflation climbed to 3.1%, long-term government borrowing costs remained elevated and the FTSE 100 fell during the month to close at 10,606. With the Chancellor’s first Budget due on 28 October, attention is increasingly turning to the public-finance outlook.

UK Policy

The Monetary Policy Committee (MPC) voted 6-3 in favour of maintaining the UK base rate at 3.75% on 16 September. The Bank of England (BoE) recognised that rising energy prices were adding inflationary pressure, but these effects had not yet been felt in wages and prices.

The next MPC meeting is due in November, and Governor Andrew Bailey has signalled that a future rise in the Bank Rate may be necessary to bring inflation sustainably back towards the 2% target.

Annual CPI inflation rose to 3.1% in the twelve months to August; up from 2.9% in July. Motor fuels were the largest contributor, with the average price of petrol rising by 9.1p per litre between July and August.

Core CPI remained unchanged at 2.6%, while services inflation was also unchanged at 3.4%, suggesting that much of the latest increase came from energy rather than a broad acceleration in underlying inflation.

Further pressure on household energy costs is also approaching. Ofgem’s energy price cap rises by 4% from 1 October, taking the illustrative annual cost for a typical household paying by Direct Debit from £1,663 to £1,723.

The next MPC decision is due on 5 November. Expectations of further tightening have increased as energy prices have risen. However, the Bank’s September survey of market participants indicated that the median expectation remained for the Bank Rate to be 3.75% after both the November and December meetings.

UK Economy

UK GDP grew by 0.4% in July; up from 0.3% in June. AI appears to have played a key role, particularly in areas like information technology, professional services and administrative services.

The labour market remains relatively soft. The unemployment rate for over-16s stood at 4.9% in the three months to July. The number of payrolled employees fell by 19,000 between June and July. In the 12 months leading up to July, payrolled employees in the UK fell by 101,000 (0.3%). Annual regular pay growth was around 3.5%, indicating that wage pressures have continued to moderate.

Government borrowing costs remained another important theme during September. The 10-year gilt yield reached its highest level since 2007, while 20- and 30-year yields reached levels last seen in 1998, whilst the benchmark 10-year gilt yield moved above 5.4% during the month. Higher yields increase the cost of servicing government debt and therefore add to the fiscal challenge facing the Chancellor ahead of the 28 October Budget.

Debate continues over how much this affects the Chancellor’s fiscal headroom. Some analysts argue it could reduce the buffer against the Government’s fiscal rules, fuelling speculation about potential tax rises or other measures in the Budget (although final policy decisions remain uncertain).

UK Market

The FTSE 100 had its biggest monthly fall since March, ending September at 10,606 after three consecutive days of decline. Inflation was a big factor weighing on investors’ minds. Despite this, the index also completed a seventh consecutive quarterly gain.

Energy markets remained an important influence on UK equities. Tensions remain high in the Middle East, which helped push Brent crude above $100 a barrel (reflecting concerns about disruption to global energy supplies).

The oil price volatility supported the FTSE’s heavyweight energy companies but also fuelled concerns about higher prices and, in turn, the prospect of interest rates remaining higher for longer. Meanwhile, higher government bond yields offered investors more competitive returns from lower-risk assets, reducing some of the relative appeal of dividend-paying equities.

Global Outlook

Central banks have continued to attract international media attention. On 16 September, the US Federal Reserve voted unanimously to raise its target range for the federal funds rate by 0.25 percentage points to 3.75-4.00%. The Fed said economic activity remained solid, but inflation was still elevated, prompting policymakers to tighten policy.

Long-term US borrowing costs also remained high. Rising government borrowing requirements and inflation concerns continued to put upward pressure on Treasury yields, despite an expansion of the Treasury’s debt buyback programme.

Trade tensions between the US and Canada also continued. Canada imposed counter-tariffs on the former at rates of 15%, 25% and 50% on C$27.6 billion of US imports, coming into force on 8 September. The measures cover sectors including steel, dairy products, appliances, agricultural equipment, pulp and paper and electronics, and were introduced in response to new US tariffs on Canadian goods.

In Europe, the European Central Bank raised its three key interest rates by 0.25 percentage points on 10 September. The deposit facility rate rose to 2.50%, and the ECB reiterated that future decisions would depend on incoming inflation and economic data.

Japan continued its move away from years of ultra-low interest rates. The Bank of Japan raised its policy rate from 1.00% to 1.25% on 18 September, its highest level in more than three decades, as policymakers continued the gradual normalisation of monetary policy.

China’s economy continued to present a mixed picture. Fixed-asset investment fell 7.2% year-on-year in the first eight months of 2026, while real-estate development investment declined 19.9%. The official manufacturing PMI improved to 49.8 in August from 49.2 in July but remained below the 50 level separating expansion from contraction.

Industrial activity was stronger. Industrial production rose 5.2% year-on-year in August, while value added in high-tech manufacturing rose 16.7% year on year. This contrast between weaker investment and stronger advanced manufacturing continued to underline the uneven nature of China’s economic performance.

The content in this article was correct on 02/10/2026.

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