Bank of Japan raises rate to 31-year high of 1.25% as global central banks tighten

Bank of Japan lifts rates to 31-year high

On Friday, 18 September 2026, the Bank of Japan increased its policy interest rate from 1.00% to 1.25%, reaching its highest level in 31 years. The decision came at the conclusion of a two-day policy meeting where board members voted 7-2 in favour of the increase. The move broke the central bank's previous cadence of adjusting borrowing costs twice a year, arriving three months after its prior rate hike. Despite the rate increase, the Japanese yen weakened as currency traders responded to the presence of two dovish dissenters on the board who favoured maintaining current borrowing costs.

Governor Kazuo Ueda explained the shift during his post-meeting news conference in Tokyo.

Up till now, our short-term policy focus was to push up underlying inflation from levels below 2%. Now, underlying inflation is approaching 2%. If risks of underlying inflation overshooting 2% materialise, that could have a negative impact on Japan's economy. It's important to stabilise underlying inflation at 2%. Our policy phase has changed.

Global central banks tighten policy

The Japanese move follows action across Western economies facing renewed price pressures. The Federal Reserve raised borrowing costs two days prior on Wednesday, while the European Central Bank increased rates the previous week. In London, the Bank of England held interest rates steady on Thursday but warned that prolonged conflict in the Middle East could force higher borrowing costs in upcoming decisions. Financial markets currently price in nearly three additional rate hikes in the United States by mid-2027, alongside two more anticipated increases in Japan, Britain, Europe, and Australia.

Reserve Bank of Australia Governor Michele Bullock noted on Friday that upside risks to domestic inflation appeared to be materialising.

Oil shock and persistent inflation

Policymakers across world capitals are managing price pressures linked to the Iran war and higher energy costs. Crude oil prices traded above $100 per barrel on Friday, gaining nearly 15% since the beginning of September. Military hostilities continued on Thursday as Saudi Arabia and Iran-backed Houthi forces in Yemen exchanged cross-border strikes, prompting civilians in Yemen to flee by boat across the Red Sea. In Beijing, Chinese officials privately contacted Tehran to urge restraint among Houthi forces following an appeal from Saudi leadership after regional military strikes.

Wholesale prices in Europe reflected these energy pressures. The German federal statistics office reported on Friday that producer prices climbed 4.6% year-on-year in August, exceeding the 4.1% forecast in a Reuters poll of analysts.

Economic resilience and fiscal strains

Consumer activity in Britain showed resilience despite higher fuel costs. Official data from the Office for National Statistics indicated British retail sales rose 0.5% in August, reversing a 0.5% contraction in July and beating economist expectations of a 0.2% decline. Year-on-year sales volumes grew 2.4%, supported by food, clothing, and department store spending following sunny weather and the June soccer World Cup, even as automotive fuel sales dropped 1.3%. However, retailers including Next, Primark, and John Lewis reported subdued conditions and reduced outlooks.

In India, credit ratings agency Moody's raised its fiscal 2027 real GDP growth forecast to 7% from 6% on Friday, citing economic resilience despite elevated energy costs and El Niño weather patterns.

Although we continue to expect India to grow faster than all other G-20 economies, as well as similarly rated emerging market sovereigns, risks remain