The global interest rate cycle diverged further as energy costs complicated the inflation outlook. The Federal Reserve raised rates for the first time since 2023 and signalled another possible increase this year, while the Bank of Japan lifted its policy rate to a 31-year high. The Bank of England held rates but warned that inflation could exceed 4% in early 2027, while Brazil continued easing.

Financial and operational risks also moved up the agenda. Financial Stability Institute chair Fernando Restoy set out how artificial intelligence could affect banks’ operational and strategic resilience, Revolut reported that an official communications channel had been misused to obtain customer information, and Turkish authorities intervened after fund liquidity pressures spread into equity and money markets.

Read more on the week's key developments:

1. Fed raises rates as projections point to another increase in 2026

The Federal Open Market Committee raised the federal funds target range by 25 basis points to 3.75%–4% on 16 September. The unanimous 12-to-zero decision was its first increase since July 2023. Chair Kevin Warsh said the economy had strengthened, credit flows remained robust and he was “hard-pressed to describe broad financial conditions as restrictive”. The Fed had therefore “removed a dose of accommodation” as inflation remained “too high and has been for too long”. Major US banks subsequently raised their prime lending rates to 7% from 6.75%.

The median FOMC projection placed the federal funds rate at 4.1% at the end of 2026, implying another quarter-point increase, and kept it at 4.1% at the end of 2027, up from 3.6% in June. Median projections put 2026 headline and core personal consumption expenditure inflation at 3.7% and 3.4% respectively, unemployment at 4.1% and economic growth at 2.3%. Warsh did not submit an individual projection and declined to prejudge the next decision, saying the September increase reflected a stronger economy, inflation trends that had not improved sufficiently and heightened geopolitical uncertainty.

2. Bank of Japan raises policy rate to 31-year high

The Bank of Japan raised its overnight policy rate by 25 basis points to around 1.25% on 18 September, effective from 24 September. The seven-to-two decision took the rate to its highest level since 1995. The BOJ said underlying inflation was approaching its 2% target, medium- to long-term inflation expectations were rising and companies were increasingly passing wage increases into selling prices. The two dissenters argued that economic and price conditions did not yet justify an increase.

Governor Kazuo Ueda said the BOJ wanted to act pre-emptively to avoid having to raise rates sharply later, adding that the need to assess incoming data carefully “doesn’t mean we can move slowly”. He did not rule out larger or consecutive increases if inflation risks intensified, although the yen weakened as markets focused on the conditional guidance and dissenting votes. Ueda identified the Middle East-driven energy shock and strong AI-related expenditure as common pressures facing major central banks. Higher rates can improve bank lending margins but increase pressure on bond portfolios and other interest-rate-sensitive assets.

3. China holds loan prime rates as retail sales growth slows to 0.4%

China’s National Bureau of Statistics released its August activity indicators and 70-city residential price data on 15 September. Industrial production increased by 5.2% year on year, but retail sales growth slowed from 0.6% to 0.4%, with automobile and housing-related purchases remaining weak. Fixed-asset investment contracted by 7.2% during the first eight months of the year. First-tier new-home prices rose by 0.1% from July, while price declines narrowed in second- and third-tier cities and year-on-year falls moderated across all three tiers.

On 20 September, the National Interbank Funding Centre, under People’s Bank of China authorisation, published unchanged loan prime rates of 3% for one year and 3.5% for five years, extending the pause to a 16th month. The one-year rate is the principal reference for much corporate and household lending, while the five-year rate guides mortgage pricing. Pressure on banks’ net interest margins limits the scope for further reductions, even as weak consumption and continued property-market fragility constrain credit demand and collateral values.

4. BIS' Financial Stability Institute chair calls for broader scrutiny of banks’ AI resilience

Supervisors must look beyond how banks deploy artificial intelligence and consider how the technology could affect their borrowers, operations and business models, Financial Stability Institute chair Fernando Restoy said on 18 September. Speaking at Cambridge University, he called for model-risk guidance to be updated for AI systems whose limited explainability complicates validation, governance and independent review. He said supervisors may need to recognise trade-offs between explainability and performance, provided the resulting risks are properly assessed and managed. The speech reflected Restoy’s own views, not necessarily those of the Bank for International Settlements or its member institutions.

Restoy divided the challenge into operational and strategic resilience. Frontier AI is narrowing the interval between the discovery and exploitation of cyber vulnerabilities, leaving banks “significantly less time” to implement defences and respond to incidents. Supervisors are consequently pressing institutions to contain incidents, maintain critical services and restore operations more quickly. Longer term, AI could disrupt borrowers and entire industries, creating risks that capital and liquidity requirements may not capture. Restoy advocated scenario analysis, strategic reviews, horizon scanning and cross-sector intelligence, arguing that “banks cannot be separated from the economies they finance”. His warning followed the BIS Quarterly Review on 14 September, which found that private credit had become an important source of funding for the digital economy and highlighted the financial-market sensitivity surrounding AI-driven investment.

5. Bank of England sets multi-year path to unwind GBP 368 billion gilt portfolio

The Bank of England set out a multi-year plan on 17 September to eliminate the GBP 368 billion ($491.9 billion) gilt portfolio held for monetary-policy purposes. The Monetary Policy Committee voted unanimously to allow GBP 222 billion ($296.8 billion) of gilts to mature and sell the remaining GBP 146 billion ($195.1 billion) by September 2034. Annual sales of GBP 20 billion ($26.7 billion), alongside maturities, will reduce the portfolio by an average GBP 46 billion ($61.5 billion) a year. A separate GBP 120 billion ($160.4 billion) of the longest-dated gilts will be retained to back current and future banknote issuance.

The Bank is also considering sales directly to the government through the Debt Management Office after examining the implications for monetary-policy independence. Separately, the MPC kept Bank Rate at 3.75% by a six-to-three vote, with Megan Greene, Catherine Mann and Huw Pill preferring an increase to 4%. UK inflation reached 3.1% in August and is projected to rise above 4% in the first quarter of 2027. Since the Bank’s July report, Brent crude and UK wholesale gas prices had risen by 36% and 78% respectively, with Brent reaching $106 a barrel on 14 September.

6. Brazil delivers fifth consecutive rate cut as inflation risks persist

Banco Central do Brasil reduced the Selic rate by 25 basis points to 13.75% on 16 September. It was the fifth consecutive quarter-point cut and took the cumulative reduction in the current easing cycle to 125 basis points. The move followed signs of weaker economic momentum, but the central bank continued to identify de-anchored inflation expectations and uncertainty surrounding energy prices, the exchange rate and fiscal policy as constraints on further easing.

Brazil is cutting rates while the Fed and Bank of Japan tighten, illustrating the increasingly uneven direction of global monetary policy. Lower rates should gradually reduce funding costs and improve borrower affordability, although the Selic rate remains restrictive in real terms. The measured pace also reflects the central bank’s limited room to support demand without adding to currency and inflation pressure. Subsequent decisions will depend on whether expectations move closer to target and whether fiscal and external risks remain contained.

7. HKMA raises base rate to 4.25% as banks hold lending rates

The Hong Kong Monetary Authority raised its base rate by 25 basis points to 4.25% on 17 September, its first increase since July 2023. The adjustment followed the Fed’s rate increase under Hong Kong’s linked exchange-rate system, through which local monetary conditions broadly follow those in the US to preserve the Hong Kong dollar’s trading band. The base rate applies to overnight borrowing through the HKMA’s discount window and does not automatically determine banks’ commercial lending rates.

HSBC and Bank of China (Hong Kong) kept their best lending rates at 5%, while Standard Chartered retained its rate at 5.25%. Local pricing also depends on banking-system liquidity, deposit competition and interbank funding conditions. HKMA chief executive Eddie Yue warned that a wider interest-rate differential between Hong Kong and the US could encourage carry trades and push the Hong Kong dollar towards the weak side of its permitted band. He urged banks and borrowers to manage their exposure to changing interest rates and funding conditions.

8. Italian regulator investigates Intesa’s EUR 30.6 billion MPS offer

Italy’s competition authority opened an investigation on 14 September into Intesa Sanpaolo’s proposed EUR 30.6 billion ($35.1 billion) acquisition of Monte dei Paschi di Siena and announced the action the following day. Intesa launched the unsolicited offer on 8 June. The authority said it would assess the transaction’s effects across numerous local and national banking and insurance markets, reflecting the two groups’ scale and overlapping activities.

Integral to the transaction is a binding agreement under which Intesa would sell Unipol a banking entity comprising the MPS brand, 635 branches and much of the central infrastructure needed to operate independently. Of those branches, 445 form a fixed disposal perimeter, while 190 may be substituted in response to competition concerns. The authority is assessing the transaction after excluding the fixed perimeter, but the investigation still introduces regulatory uncertainty over a deal that would materially reshape Italian banking.

9. Revolut denies direct contact after reported $3 million data ransom threat

Revolut said on 16 September that it had received no direct contact or ransom demand from attackers reportedly threatening to sell confidential records unless the company paid $3 million. The incident involved fraudulent information requests sent from a legitimate government-agency email domain, leading Revolut to disclose data to an unauthorised party. About 680 customers were affected, according to a source familiar with the matter, although Revolut described the number as “very limited”. Reported exposed information included dates of birth, postal and email addresses, telephone numbers and copies of identity documents.

The attackers claimed that they had targeted customers with substantial cryptocurrency holdings, but Revolut has not confirmed how the individuals were selected. It said its core infrastructure, databases, customer accounts and funds were unaffected. After detecting the fraud, Revolut blocked the address and alerted the government agency concerned, law-enforcement bodies, data-protection authorities and financial regulators. The incident shows that authenticated communications infrastructure can itself become an attack vector, requiring banks to verify the authority, legal basis and provenance of sensitive data requests independently of the domain from which they arrive.

10. Türkiye intervenes after fund liquidity stress hits equity market

Turkish authorities intervened on 17 September after investment funds struggled to meet redemptions and selling pressure spread through the equity market. The BIST 100 fell by more than 5% on Wednesday and rebounded by 2.6% following Thursday’s measures, but remained down 6.9% for the week at the time, its weakest weekly performance since March 2025. The banking index rose by about 8%. The central bank increased repo funding to TRY 300 billion ($7.2 billion) and raised banks’ interbank borrowing limits tenfold to support lira liquidity.

The Capital Markets Board suspended trading in affected funds and ordered the liquidation of funds managed by seven portfolio companies. İşbank was appointed to oversee the liquidation of Tera funds, while Ziraat Bank was appointed for funds managed by A1 Capital, Atlas, Bulls, Hedef, Pardus and Pusula. The regulator separately referred 38 people to prosecutors over suspected manipulation involving shares in three listed companies and imposed two-year trading bans; Pusula and some of its executives were directly connected to that action. The episode combined liquidity mismatches and concentrated holdings with potential market-conduct failures, requiring intervention across banking, securities and money markets.

What to watch

Bank Indonesia and South African Reserve Bank policy meetings on 23 September; Norges Bank and Sveriges Riksbank policy decisions on 24 September; US personal consumption expenditures inflation data on 25 September; Reserve Bank of Australia policy meeting on 29 September; and Reserve Bank of India MPC decision on 30 September.