Nothing reminds people that the summer holidays are already over more than talk of energy prices and the potential rise in the cost of borrowing.
Rising oil prices have increased what drivers pay at gas stations and drained household budgets in recent months, and concerns remain about whether the economic effects of the war between the United States and Iran may lead to a significant rise in the cost of living.
Amid conflict in the Middle East and expectations that inflation “may remain well above” its 2% target for some time, the European Central Bank raised interest rates this week to 2.5%.
Other central banks are also expected to join the ECB, as the United States and the United Kingdom prepare to make interest decisions next week.
The Federal Reserve may be the first to take a similar step by raising interest rates at its meeting next Wednesday, after keeping the key rate unchanged for five consecutive meetings in the range of 3.5% - 3.75%. The last change he made was to cut interest rates last December.
However, the strength of the labor market, and statements by US President Donald Trump that he does not believe that oil prices may decline before the end of the war with Iran, which is expected to happen after the November elections, were among the factors that prompted many analysts on Wall Street to bet on a rate hike this month.
Why is the US economy ringing the alarm?
“I will not resign”: The Federal Reserve Governor responds to Trump’s decision to fire her
Skip the most read and keep reading
Most read
Most read end
Skip the podcast and keep reading
Worth paying attention to
An in-depth explanation of the most prominent events and topics, to help you understand the most important variables around you and their impact on your life
Episodes
End podcast
Newly appointed Federal Reserve Chairman Kevin Worsh did not reveal his position on the future path of interest rates, but his statements on more than one occasion that the central bank's focus should be on slowing the pace of price increases increased expectations that the bank would raise key rates.
Economists at Deutsche Bank see a rate hike as “the most likely outcome for monetary policy,” pointing to statements by Warsh and other members of the Federal Reserve.
Opinions vary somewhat on this issue, as the American economist at Oxford Economics, Grace Zwemer, expects the interest rate to remain unchanged, but there seems to be a consensus that reducing the interest rate is unlikely.
However, Trump is back pushing for lower interest rates.
“The Federal Reserve, with its wonderful new leadership, must get wiser and be patriotic for once,” the US president wrote on social media last week.
The US-Iran war and the resulting rise in global oil and gas prices are fueling concerns about inflation.
Restrictions were also imposed on shipments passing through the Strait of Hormuz, one of the busiest oil and gas corridors in the world, due to the war, which brought the price of a barrel of Brent crude at the time of writing to about $105, approaching the levels last recorded when the conflict broke out.
As well as directly raising costs for homes and businesses, higher energy prices can also make transporting goods more expensive, which is passed on to consumer prices in the form of higher prices for many goods such as food and other necessities.
Central banks seek to limit price increases by raising interest rates. By increasing the cost of borrowing for purposes such as mortgages and credit cards, it seeks to slow consumer spending and inflation. High interest rates can also prompt people to save rather than spend.
But it is a delicate balancing act, as higher interest rates could also prompt companies to slow down the pace of investment and hiring to avoid paying higher interest rates, which could hurt economic activity.
When the Bank of England meets later next week, it is expected to try to look at both current inflationary pressures and the larger economic picture.
Inflation: Five ways how raising US interest rates will impact your life
Trump promises to distribute money to Americans if his party wins!
Millions of UK households are expected to see energy bills rise to their highest level in three years as winter approaches, and gas prices have risen to more than 200 pence per therm (100,000 BTU) for the first time since late 2022.
The inflation rate in the United Kingdom rose by 2.9%, according to the latest readings, and is expected to jump to higher levels in the coming months.
But despite these expectations, there appears to be widespread agreement among analysts and observers of the British economy that the bank may keep interest rates at 3.75%.
This is because there is “no indication” that the so-called second-round effects of the price shock, such as demands for higher wages or companies raising prices, will trickle down to the economy, according to Oxford Economics.
Economist Alexander Harvey added that this “expands the margin of maneuver” for the Bank of England.
Yael Selvin, chief economist at KPMG, said the economic environment outside the United States, and in places like the United Kingdom, is “much weaker” than it was in 2022 when the world experienced the last inflationary shock. UK inflation reached a record high of 11.1% in October of that year.
She added that interest levels are already higher than they were four years ago, and that consumers, who are still suffering from the effects of previous price increases, have resorted to changing the way they spend.
