The U.S. Federal Reserve raised interest rates by 25 basis points Wednesday, delivering its first hike in three years as persistent inflation outweighed President Donald Trump’s repeated calls for lower borrowing costs.

The move lifted the Fed’s benchmark rate as policymakers sought to curb renewed price pressures despite political pressure for monetary easing.

The central bank also signaled that another rate increase could follow before the end of the year, underscoring concerns that inflation remains too high to justify a shift toward looser policy.

The decision marks a sharp turn in the U.S. monetary policy outlook after the Fed had previously moved toward lower rates. Recent inflation readings and resilient economic activity had strengthened expectations that policymakers would resume tightening.

Trump has repeatedly pressed the Fed to cut interest rates, arguing that lower borrowing costs would support economic growth. The rate increase instead highlights the central bank’s focus on bringing inflation under control.

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A top European Union official cautioned again on Wednesday about unsustainable trade with China, pledging to use “all tools” available to counter the growing deficit.

The EU’s trade talks with China must deliver results, European Commission President Ursula von der Leyen said, warning that the bloc would “use all tools at our disposal to rebalance our relationship.”

“Our trade deficit with China is now 1 billion euros ($1.2 billion) a day. It has reached a tipping point,” she said during a speech to the European Parliament in Strasbourg, France.

“Some say the second China shock is looming. But it’s already here,” she added.

She went on to say that this shows “in our communities and in factories” across the union, adding that it leads to deindustrialization in the industrial heartlands of Europe.

“This is unsustainable,” von der Leyen said.

“Let me be clear – we will use all the tools at our disposal to rebalance our relationship. Words are good. But deeds are better.”

However, she also pointed to dependencies on China, noting that the bloc is more than 80% dependent on China for many critical raw materials

“We have done a lot. But we are not the only ones trying to diversify. We need to urgently procure and build up our reserves,” she said.

“No country can do this alone. So we need to think differently. This is why we will establish a new European Corporation on Critical Raw Materials,” she added.

“It will help us obtain and stockpile what we need. For electric cars, chips and batteries, clean tech and defence. And so much more.”

FTAs, Middle Corridor

The EU chief also mentioned the recent free trade agreements (FTAs) the bloc has agreed upon, suggesting that in this age, prosperity and security “will not only be built at home.”

“This year, we have signed free trade agreements with India, Mercosur, Mexico, Australia and Indonesia,” she said.

“We now have trade deals in place with more than 80 countries,” she added.

She also provided details on planned investments for the international connectivity project.

“It will link the South Caucasus and Central Asia directly to the European market – what we call the Middle Corridor,” she noted.

“Through Global Gateway, we will aim to crowd in up to 12 billion euros ($13.8 billion) in public and private investment. Our goal is to diversify routes, triple trade flows and slash freight transit times by 2030.”

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Türkiye’s disinflation process has been successful but is moving more slowly than desired, Treasury and Finance Minister Mehmet Şimşek said Wednesday, attributing the slowdown to a range of domestic and external factors.

“If there had been no war this year, inflation would be at least 7 percentage points lower as of today,” Şimşek told the private broadcaster Bloomberg HT.

He added that the conflict had affected not only oil and natural gas prices but also commodity prices more broadly, creating stronger pressure in Türkiye because the country’s inflation rate remained relatively high.

The annual consumer price index (CPI) in Türkiye eased for the third consecutive month in August to 31.5%, from 31.8% in July, while monthly inflation was 1.84%.

The downward trend that started in mid-2024 had stalled this year following a sharp rise in energy prices caused by the Iran war.

Inflation inertia remains challenge

Şimşek said inflation had shown more persistence than the government’s economic model had anticipated, citing strong backward indexation in rents, education and wages.

He said exchange-rate pass-through in Türkiye was between 30% and 40%.

“There is no change in the direction or framework of our policies,” Şimşek said, adding that the government’s targets were largely on track.

Earlier this month, the government unveiled an updated Medium-Term Program (MTP), which projects a year-end inflation of 28.4%, compared to 16% estimated last year.

Officials said the war in the Middle East had played a key role in the upward revision.

Inflation is projected to fall to 21% next year, 13.5% in 2028 and 9% in 2029, according to the MTP.

Şimşek said disinflation does not mean prices are falling, but that the pace of price increases is slowing.

Şimşek said monetary policy had been more effective in reducing core goods inflation. Services inflation had also begun to respond, although it had initially shown considerable inertia, he added.

Without the war, year-end inflation would have been around 21% to 22%, Şimşek said, adding that the timeline initially envisaged by the government could be extended somewhat.

“Cost-of-living pressures are our biggest priority,” he said, adding that the government would not abandon disinflation during the election process because it was necessary for sustainable growth.

The next elections in Türkiye are scheduled for May 2028.

Authorities have been pursuing tight monetary and fiscal policies to balance domestic demand and combat high inflation, putting pressure on economic growth.

The Central Bank of the Republic of Türkiye (CBRT) has kept its benchmark policy rate at 37% in the last four policy meetings as ⁠it monitors Iran war fallout.

Fiscal targets remain on track

Şimşek said the Medium-Term Program had two main functions: serving as a binding policy commitment for the government, particularly in budgetary terms, and providing a road map for the private sector.

He said the government had maintained its policy framework for three years and had performed better than its target for the budget deficit as a share of gross domestic product.

Türkiye this year launched a sliding-scale tax adjustment system, implemented to limit the impact of rising oil prices and inflation on ⁠consumers. Authorities last month removed diesel from ⁠the system, while gasoline and liquefied petroleum gas (LPG) will remain until Oct. 1, when the mechanism is ⁠set to be abolished.

The government gave up significant tax revenue with the system, said Şimşek. Despite this, the government expects the budget deficit to reach 3.1% of GDP, compared with a target of 3.5%, he added.

Türkiye had removed a special consumption tax on diesel until the end of August and reinstated it this month. The tax will rise incrementally by TL 3 each month until it reaches about TL 13.1 per liter on Jan. 1, the same level as before the removal.

Şimşek said the government had achieved many of its targets under the Medium-Term Program, including the gradual exit from foreign-exchange-protected deposits. He also said reserves were no longer a major concern and that growth remained moderate but reasonable compared with the global economy.

Flexible exchange rate regime not currently possible

Şimşek said Türkiye’s normal preference was a floating exchange rate regime, but current market conditions did not allow for a more flexible approach.

He said sustained demand for the Turkish lira could lead to excessive appreciation if the currency were left entirely to market forces, while intervention could create pressure in the opposite direction.

“A more flexible exchange-rate regime could be considered once inflation reaches single digits,” Şimşek said, adding that current conditions did not permit such a move.

He warned against reducing all economic discussions to the exchange rate, saying the government would pursue a comprehensive approach focused on reforms and productivity.

Türkiye does not face a problem securing raw materials, he said, but energy markets remained highly sensitive, particularly for oil and natural gas derivatives.

New support for manufacturers

Şimşek said access to finance remained a key issue for the real sector and that the government was providing substantial targeted support while taking competitiveness into account.

The average interest rate on loans provided to farmers is 12%, he said, adding that the government covers 70% of the interest cost for nearly 1 million farmers.

The government has also increased rediscount loans and provided significant export-related support to manufacturers, Şimşek said.

The capital of Türkiye’s Eximbank has been increased sevenfold, allowing it to provide $60 billion in loans this year, he added.

Since the end of 2023, the government has identified 284 products eligible for investment support. Companies producing these products can access investment loans with maturities of up to 10 years and a total planned size of TL 750 billion, Şimşek said.

He also said monthly wage support of nearly TL 5,000 per employee was being provided in several sectors.

The government will introduce working-capital support for the manufacturing industry, beginning with TL 250 billion this year and potentially increasing the amount later, Şimşek said.

He added that targeted policies were being used to ease pressure on the real sector without undermining the broader monetary-policy framework.

No election economy

Şimşek rejected claims that the government would adopt an election-driven economic policy.

“Those who say we will implement an election economy have either not read the Medium-Term Program or do not understand mathematics,” he said.

He added that the government had met its budget targets over the past three years and had often performed better than planned.

The government has largely completed housing projects in the southeastern region struck by devastating earthquakes in early 2023 and plans to build 750,000 social housing units annually over the next few years, Şimşek said.

About TL 250 billion will be allocated for the program in the budget, he added.

Tax revenues expected to rise in 2027

Şimşek said there were no plans for new indirect tax measures beyond efforts related to corporate income tax, personal income tax and balancing the current account.

The number of income taxpayers has increased to 5.5 million as part of the government’s campaign against the informal economy, Şimşek said.

Tax revenues are expected to increase in 2027 due to GDP growth, the assumption that the sliding-scale mechanism will not continue and further efforts to combat informality, he added.

Net exports the only drag on growth

Şimşek said growth had slowed relatively in recent years but remained in line with the global economy.

Türkiye is growing 1.5 to two times as fast as its trading partners, he said, adding that the government’s economic program had contributed to the slowdown but was designed to ensure more sustainable growth.

Growth is still expected to reach 3.3% this year, according to Şimşek. The economy expanded 2.3% year-over-year in the second quarter, following a 2.6% expansion in the first ⁠three-month period.

The war has been the biggest global shock since the 1970s and has lasted for an extended period, affecting investment decisions, Şimşek said.

External conditions are currently having a significant impact on growth, he added, stressing the importance of balanced, high-quality and sustainable expansion.

“Net exports are the only factor pulling growth down,” Şimşek said.

House prices in Türkiye continued to lose value in real terms in August, extending a decline that has persisted for nine months, data showed Wednesday.

The residential property price index rose 0.9% month-over-month and increased 23% from a year earlier in nominal terms, the Central Bank of the Republic of Türkiye (CBRT) said.

Adjusted for inflation, however, it fell 6.5%.

Annual inflation stood at 31.51% in August, meaning house prices continued to rise more slowly than consumer prices.

The index had increased 1.5% and 25% on a monthly and annual basis, respectively. Adjusted for inflation, home prices fell 5.1% year-over-year.

In the three biggest cities, Istanbul, Ankara and Izmir, house prices increased 1.9%, 1.5% and 2.7% month-over-month, respectively, the data showed.

On an annual basis, the index rose 6.3% in Istanbul, 24.8% in Ankara and 23.3% in Izmir.

Rents also drop in real terms

CBRT’s data showed the new tenant rent index, which tracks newly signed lease contracts, also continued to decline in real terms.

The index rose 2.3% month-over-month in July and 26.4% year-over-year in nominal terms. In real terms, the index declined 3.9% from a year ago.

Monthly increases in the index reached 4.9% in Istanbul, 2.6% in Ankara and 5.4% in Izmir.

In Istanbul, annual rent growth stood at 34.5%, exceeding the inflation rate. Annual rent increases were 28.3% in Ankara and 25.5% in Izmir.

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Türkiye’s central bank governor warned Wednesday that energy shocks could have longer-lasting effects on inflation if cost pressures spill over into wages and prices, saying repeated supply disruptions could make it harder for policymakers to contain price increases.

Central banks could limit the initial impact of energy shocks through timely and restrictive measures, but second-round effects require close monitoring, Central Bank of the Republic of Türkiye (CBRT) Governor Fatih Karahan told a summit in Budapest.

Since the United States and Israel launched attacks on Iran in late February, fears of supply disruption have pushed oil prices sharply higher, with the surge in energy costs feeding into fuel and transport prices and lifting global inflation expectations.

Attacks since late August on military, shipping and energy assets across the Middle East have sent oil prices back above $100 a barrel and revived fears about a wave of price hikes.

That price outlook, coupled with the relentless surge in energy costs, has bolstered market bets for rate hikes by the world’s biggest central banks.

Karahan said central banks are accustomed to economic disruptions, adding that the shocks currently affecting the global economy were lasting longer than in previous periods.

Energy shocks, inflation

The global production structure has changed significantly over the past 20 to 30 years, as companies built extensive supply chains and countries became more economically interdependent, said Karahan, as cited by the Turkish media.

These links need to be properly assessed during periods of change, he noted, particularly as energy-related supply shocks pass through to inflation.

While initial price effects could be contained through policy measures, the process could become more complex if shocks affected wages, pricing behavior and inflation expectations, Karahan said.

He added that successive supply shocks could make inflationary pressures more persistent and increase the need for longer-term policy solutions.

Second-round effects could entrench inflation

Karahan said central banks should focus not only on the initial movement in prices but also on the impact of supply shocks on inflation expectations and pricing behavior.

Well-anchored inflation expectations give central banks greater room to respond to first-round effects, he said. However, controlling the impact becomes more difficult when shocks spread to wages, prices and exchange rates.

The risk is particularly significant for emerging markets, where external shocks can have a stronger impact on exchange rates if inflation expectations are not sufficiently anchored, he said.

Tighter monetary policy may be needed

Karahan said geopolitical tensions in the Middle East were creating upward pressure on energy prices.

A tighter monetary policy stance could be one of the tools used to limit the risk that deterioration in the inflation outlook becomes permanent, he said.

Fiscal policy could also help soften the initial impact of energy shocks on prices, Karahan added, saying monetary and fiscal policies could support each other during such periods.

Gold, dollar demand

Karahan said growing fragmentation in the global economy was affecting central banks’ reserve-management decisions.

Gold has distinct characteristics as a commodity, financial asset and reserve instrument, he said, adding that central banks had recently increased their focus on gold.

However, this did not mean that the dollar’s dominant position in the international monetary system would change rapidly, Karahan said.

The dollar’s deep and highly liquid markets continued to support its position in the global reserve system, he added.

Geopolitical risks, financial pressures and uncertainty over market access were also influencing reserve preferences, while central banks’ demand for gold remained strong, Karahan said.

Reserve management

Reserve management has traditionally been based on three factors – security, liquidity and return – but access should now be added to that framework, Karahan said.

Some reserve assets considered liquid under normal conditions may not be equally accessible during periods of market stress, he noted.

As a result, the total size of reserves is not the only relevant measure. Their practical usability when needed is also important, he said.

Rising gold prices

Karahan said gold had long played an important role in Türkiye’s financial system and remained one of the main savings instruments for households.

A significant amount of gold is held physically outside the financial system, while gold deposits also represent an important part of the banking system, he said.

The central bank supports balance in the gold market through reserve requirements, swap transactions and other measures, Karahan added.

Higher gold prices can increase the value of reserves and gold’s share of total reserves, but this does not mean that available liquidity rises by the same amount, he said.

“The more important question is not how much we have, but how much of what we have we can use, particularly under stress scenarios,” Karahan said.

Karahan said global economic integration had boosted efficiency and created disinflationary effects for many years.

However, as economic ties increasingly became part of geopolitical competition, policymakers could no longer assume that the conditions of the previous period would continue unchanged, he said.

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Annual inflation in the U.K. accelerated in August as the conflict in the Middle East continued to pose upward pressure on fuel prices, official data showed Wednesday.

The consumer price index (CPI) rose 3.1% in the 12 months to August, up from 2.9% the previous month, the Office for National Statistics (ONS) said.

Higher inflation adds pressure on Prime Minister Andy Burnham and Treasury chief John Healey to ease the cost of living for households ahead of the Labour government’s budget update next month.

The Bank of England (BoE) is forecast to maintain its benchmark interest rate at 3.75% on Thursday as the U.K. economy struggles for growth.

To tackle persistently high consumer prices, the U.S. Federal Reserve (Fed) is expected to lift borrowing costs on Wednesday, following a similar move by the European Central Bank (ECB) last week.

With central bank interest rates on the rise – and government bond yields reaching multidecade highs in recent weeks – Healey has pledged to maintain strict fiscal discipline.

But he has not been drawn on whether this means his budget on Oct. 28 will include new tax rises.

Analysts expect inflation to rise toward the end of the year as higher energy costs feed through to bills further, with little sign of a deal to end the Middle East war.

“With the situation in the Middle East looking increasingly fraught, the expectation is that inflation will continue to climb higher until the end of the year at a minimum,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

“For the government, today’s figures are a kick in the teeth for an administration that wants to make easing the cost of living its central mission,” he added.

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