On 23 September the OECD published its Interim Economic Outlook and warned that global inflation will run faster than previously expected in 2027, forcing central banks to stay tight for longer - from the US to Australia. The more interesting part is not the headline but how differently four major central banks now look. The OECD expects the Fed and the ECB to hike once more this year and then pause at least through 2027. It sees the Bank of Japan continuing toward 2% by end-2027. And it suggests the Bank of England may not have to raise rates at all.
Fig. 1. Policy rates of the Fed, Bank of England, ECB and Bank of Japan, September 2026. Source: central bank data.
Fig. 2. Change in policy rates since the start of 2026. Source: central bank data.
It is telling that the Fed meeting itself hinted at what comes next: 16 of 18 participants expect another hike this year, and four of them allow for two. Yet the projections show no increases in subsequent years - only cuts in 2028 and 2029. So "once more, then pause" is not cautious wording; it is what the committee itself pencils in. The ECB follows similar logic: a Reuters poll had economists expecting a second and final hike in September, and Christine Lagarde called the decision a "no brainer".
That makes the real question not whether the next move is up or down, but why markets price roughly 4.9% on short-term rates by end-2027 - a lot for an economy growing about 1%, especially since a large part of that upward slope is risk premia rather than genuine rate expectations. The OECD trimmed its 2027 UK growth forecast to 1.0% from 1.1%, while upgrading 2026 to 1.1%.
Debt is the other squeeze. The OECD flagged rising government bond yields worldwide: sovereign debt is getting more expensive, straining budgets and lifting term premia. For Britain, with inflation of 3.1% this year and 2.6% next, that points to a long stretch of expensive money.
Fig. 3. Inflation forecasts for 2026 and 2027, percent. Source: Fed, ECB, OECD.
Fig. 1. Policy rates of the Fed, Bank of England, ECB and Bank of Japan, September 2026. Source: central bank data.
Four banks, four different stories
The clearest way to see it is through what each has already done in 2026.- The Bank of Japan has hiked twice, to 1.25% on 18 September, and the OECD expects 2% by end-2027. This is no longer an experiment but a full exit from the era of zero rates.
- The ECB has hiked twice, in June and on 10 September, lifting its deposit rate to 2.50%, and the OECD sees one more move.
- The Fed raised rates on 16 September for the first time since 2023, to 3.75-4.00%, and itself signals one more increase before year-end.
- The Bank of England has not moved all year, holding Bank Rate at 3.75% again on 17 September.
Fig. 2. Change in policy rates since the start of 2026. Source: central bank data.
Why Britain stands apart
The split comes down to how the energy shock is transmitted. The conflict in the Middle East has pushed oil and gas higher, and Britain is already feeling it: inflation accelerated to 3.1% in August, and the Bank of England expects above 4% in early 2027. Three of nine MPC members voted to hike, but a 6-3 majority chose to wait: UK financial conditions have tightened more than elsewhere, which is itself restraining prices. According to the Financial Times, the OECD says plainly that the Bank of England can avoid raising rates.It is telling that the Fed meeting itself hinted at what comes next: 16 of 18 participants expect another hike this year, and four of them allow for two. Yet the projections show no increases in subsequent years - only cuts in 2028 and 2029. So "once more, then pause" is not cautious wording; it is what the committee itself pencils in. The ECB follows similar logic: a Reuters poll had economists expecting a second and final hike in September, and Christine Lagarde called the decision a "no brainer".
That makes the real question not whether the next move is up or down, but why markets price roughly 4.9% on short-term rates by end-2027 - a lot for an economy growing about 1%, especially since a large part of that upward slope is risk premia rather than genuine rate expectations. The OECD trimmed its 2027 UK growth forecast to 1.0% from 1.1%, while upgrading 2026 to 1.1%.
Debt is the other squeeze. The OECD flagged rising government bond yields worldwide: sovereign debt is getting more expensive, straining budgets and lifting term premia. For Britain, with inflation of 3.1% this year and 2.6% next, that points to a long stretch of expensive money.
Fig. 3. Inflation forecasts for 2026 and 2027, percent. Source: Fed, ECB, OECD.
What it means for markets
For markets this is less a rates story than a divergence story. Japan is normalising policy and compressing the yield gap that fed the carry trade for years. The US and Europe are levelling off - but at a high level. Britain is standing still, and if the OECD is right, its next step is down. The longer that gap persists, the more pressure on the yen, the more expensive debt service becomes, and the greater the chance that a "final hike" somewhere turns out not to be final.
ℹ INFO
The real message from the OECD is not in the specific numbers but in the timing: the rate-cutting era is being pushed back. Inflation is returning to 2% more slowly than expected, and central banks are having to say so in public.
⚠ IMPORTANT
Britain's risk mirrors its own caution: holding rates has worked only because financial conditions tightened on their own. If the energy shock drags on, the Bank of England may have no choice but to hike - and the pause becomes falling behind.