16 September 2026: UK borrowing costs highest since 2007 amid global debt sell-off

The jobs market stayed weak, with pay growth near a six-year low, the fewest vacancies since 2021, and hiring down, according to data that added to expectations that the Bank of England will keep interest rates on hold this week despite inflationary pressure from the Iran war.

Average weekly earnings, excluding bonuses, grew by 3.5% in the three months to July compared with the same period in 2025, the Office for National Statistics said on Tuesday.

The pace of growth was close to its slowest since 2020 and in line with the median forecast in a Reuters poll of economists.

Job vacancies in the three months to August fell to 702k, the lowest since 2014, excluding the COVID-19 pandemic period. Small businesses cited the high cost of employment as a reason for fewer job postings.

The Department for Work and Pensions' preliminary measure of payrolled employees dropped by 26k in August. July's reading was revised down to show a 19k drop in payrolls, from a flash estimate of 13k.

Britain's unemployment rate, based on a survey still being overhauled, held steady at 4.9% in the three months to July.

The data strengthens the case for the Bank of England to leave rates unchanged tomorrow. The labour market is clearly weakening, wage pressures are easing, and vacancies continue to fall, all of which reduce the risk of persistent inflation and make a rate hike unlikely.

The only counter‑pressure is higher energy prices, but the jobs data itself pushes firmly toward “hold”.

The combination of weaker hiring, falling vacancies, and moderating pay is exactly what dovish MPC members have been waiting for, although last month’s ‘dissenters’ will still see rising energy prices as a reason to increase rates.

This report offers nothing that would give an inflation-wary Central Banker reason to lose sleep. Indeed, assuming inflation was hovering around said Central Banker’s target, they might be starting to think that the risks might just be tilting towards a slowdown rather than an overly hot economy.

Yesterday, the yield on 10-year gilts, the standard gauge of what the Treasury pays to borrow, rose from 5.37% to a new 19-year peak of 5.41%, driven by rising oil prices that threaten to reignite inflation.

Mortgage specialists warned that residential and buy-to-let mortgage rates are poised to rise towards 5%, with market turbulence at risk of spilling over into household budgets. Short-term borrowing costs also spiked, as the yield on two-year UK bonds exceeded 4.9% for the first time in three years.

Experts say homeowners face higher rates as the bond market upheaval forces major lenders to reprice residential and buy-to-let mortgages.

Rohit Kohli, director at The Mortgage Stop, said the bond markets are driving the market and cautioned that gilts and swaps are unfavourable for borrowers. He noted that borrowers with substantial deposits can still secure rates near 4.5% to 4.6%, though that opportunity is shrinking week by week. He added that rates are likely to keep edging up until swap rates stabilise.

Headline CPI inflation is expected to rise from 2.9% in July to 3.1% in August, when the data is published later this morning, while the core number is likely to remain at 2.6%.

Sterling weakened modestly yesterday, slipping against both the Euro and the US dollar. The move was small but broad‑based, reflecting a mild risk‑off tone and continued expectations that the Bank of England will keep policy on hold.

Headline PCE inflation is projected to remain steady at 3.7% in August, despite rising global oil prices. Core PCE inflation is expected to hold at 3.3%, with notable contributions from higher airfare and wireless service costs.

Methodological changes in the upcoming PCE report are expected to paint a more positive picture of inflation, potentially reducing core PCE by 0.2%. Higher energy prices pose a risk to inflation forecasts, but if oil prices decline, inflation could approach the Federal Reserve’s 2% target by year-end.

The report indicates that although energy costs have surged, their impact on the PCE index is more limited than on the CPI. Meanwhile, services inflation shows signs of further moderation, supported by a labour market that is far from overheating.

Surging oil prices have long been anathema to markets and the economy, but the latest shock may matter less this time, according to economists at JPMorgan Private Bank.

Oil spiked back above the $100-a-barrel mark last week, an important psychological threshold that has come to signal energy-market stress. Brent Crude, the international benchmark, surpassed $100 for the first time since July and has continued to rise in recent days, trading around $107 a barrel on Tuesday. West Texas Intermediate Crude also rose, hovering around $103 a barrel.

The $100 mark has been a clear line of demarcation during the Iran war, with oil oscillating above or below the level as peace hopes have waxed and waned during the six-month conflict.

After years of historically low oil prices, it also signals brewing pressure for markets and the economy.

Yet the threshold may simply not be as meaningful as it once was, Kriti Gupta, a global investment strategist at JPMorgan, said. She pointed to the cost of energy as a percentage of total disposable income, which is near historic lows. Americans spend an average of 2.5% of their income on energy, heating their homes and putting fuel in their vehicles, down from over 6% during the oil price shock of the 1970s and 1980s.

An inflationary shock like that experienced by Americans in the early 1980s would be equivalent to fuel prices rising above $10 a gallon today, the bank estimated, pointing to protective factors such as consumers' extra cash buffers and lower debt levels.

"After several rounds of fiscal stimulus, tariff refunds and tax cuts, households have largely deleveraged to multi-decade lows, creating a larger buffer against higher prices," Gupta wrote.

"The same gasoline price increase that would have meaningfully squeezed household budgets two decades ago, or even as recently as four years ago, now represents a materially smaller drag on spending power," she added, referring to the crude price shocks of the early 2000s and the early days of the Russia-Ukraine war.

While a hold at 3.5%-3.75% is likely, rising oil prices mean that futures markets have priced in a growing chance of a rate hike at tonight’s meeting. The CME’s FedWatch tool indicates a 30% chance of a rate hike at tonight’s FOMC meeting.

The question is whether new chair Kevin Warsh will spring a ‘surprise’ hike on financial markets. The Fed Funds Futures market suggests there is a decent chance the Fed will embark on a pre-emptive rate hike to address potential inflation risks ahead of time. But is the market right to think this?

If the Fed decides to hike rates tonight, it would not be based on current labour market or inflation readings; instead, it would be rooted in risk management, in case of future changes. The economic data currently available to the Fed does not suggest the US economy is overheating.

The USD strengthened across FX markets yesterday, rising against every major currency. The move was broad-based, driven by hotter US inflation, sharply higher Treasury yields, and a strong repricing of Federal Reserve rate-hike expectations.

German Chancellor Friedrich Merz confirmed that cooperation and trade between Germany and the United States have declined significantly due to new US tariffs and regulations. He also warned of direct negative repercussions for the two countries' economic relations.

Merz explained that Washington's tariffs had significantly reduced trade volume. Furthermore, increased transaction costs were evident, affecting businesses, particularly in the automotive, machinery, and manufacturing sectors.

These developments are casting a shadow over the German economy, which is heavily reliant on exports. As a result, officials in Berlin have warned of the dangers of continued trade uncertainty.

The German Chancellor called for a swift negotiated solution to the ongoing trade dispute. He also stressed that the goal is to reduce the burden on European companies and prevent the transatlantic rift from escalating.

The German government, in coordination with the European Union, is seeking to develop a flexible approach to address current customs challenges. Meanwhile, it aims to maintain the depth of the economic partnership between Berlin and Washington.

Traders and Central Bankers are increasingly diverging on the outlook for European interest rates. Money markets have turned more hawkish as a surge in energy prices has revived inflation concerns. As a result, markets now imply four further quarter-point rate rises from the ECB over the next 12 months, and five such increases from the Bank of England.

France would back Dutchman Klaas Knot to succeed Christine Lagarde as European Central Bank President, provided a French candidate secured the powerful post of ECB chief economist, Reuters reported.

The informal proposal has the support of French President Emmanuel Macron, sources said. However, it would likely face stiff resistance from Germany, setting the stage for high-stakes haggling among the Eurozone's political and economic heavyweights.

Macron's office did not immediately respond to a request for comment, while Knot declined to comment. The Dutch Finance Ministry was not immediately available for comment.

It is unclear how much the informal agreement among EU nations to avoid appointing a German as ECB President still matters. Over time, the ECB has existed, and Germany has had less and less influence over the Central Bank, mainly because successive Presidents have steered it toward a more Eurozone-wide perspective.

The Euro weakened slightly on FX markets yesterday, losing ground against most major currencies. The day’s moves were modest but broadly negative, reflecting a stronger US dollar and a mild risk-off tone.

Have a great day!