Central Bank Watch - 17th September 2026 - Fed Hikes, BOE decision pending

The Fed moved first, now all eyes on the Bank of England.

Two central bank decisions this week. The first landed Wednesday, second is due today (BOE, 12pm - Thursday 17th Sept).

What the Fed did

On Wednesday the Federal Open Market Committee voted unanimously, 12 to 0, to raise the federal funds target range by 25 basis points to 3.75% to 4.00%. It is the first increase since 2023, and Chair Kevin Warsh suggested another rise could come before year end.

The projections matter more than the decision itself. Most officials now expect the benchmark rate to sit between 4.1% and 4.4% at the end of 2026, up from a previous range of 3.6% to 4.1%. That indicates the Fed thinks inflation has more staying power than it did in June.

Why the pound dropped

Sterling fell 0.68%, around 91 pips, and dropped back below 1.3400. At the midpoint, the US policy rate now sits above UK Bank Rate for the first time this year.

Yield advantage has now flipped to the dollar. GBP/USD has been trading around 1.3380 this morning, near its lowest since 30 July, and it has slipped below its 200-day simple moving average at 1.3454, a level plenty of traders treat as a line in the sand.

What to expect from the Bank of England at 12:00

Bank Rate has been 3.75% since December 2025. In July the committee voted 6 to 3 to hold, with three members preferring an increase to 4%, which is an unusually open split for a body that likes to look united.

Yesterday's inflation print did not make the decision easier. CPI rose to 3.1% in the 12 months to August, up from 2.9% in July and a five-month high. Motor fuel did most of the damage, up 23.0% over the year, with petrol at 161.3 pence per litre, the highest since November 2022. The offsetting comfort is that core CPI held at 2.6% and services inflation was unchanged at 3.4%.

That mix gives the Bank cover to hold, and a hold is what almost everyone expects. Markets put the chance of an immediate hike at roughly 20%. The longer view is considerably more aggressive: futures fully price 4 Bank of England hikes by the middle of next year.

One detail worth flagging. The 10-year gilt yield traded near 5.4% recently, the highest since 2007. Normally a higher yield supports a currency. When the market is pushing yields up on its own rather than the central bank doing it, that extra return is the price of holding the debt rather than a reward, and sterling does not collect it. Goldman Sachs has argued the gilt market may have gone too far in pricing hikes, and Governor Bailey said last week that another rise is not inevitable.