Bank of Japan raises interest rate to 1.25%, Bank of England holds at 3.75% following Fed hike

Two days after the Fed raised the interest rate to the 3.75%-4% range, the Bank of Japan also raised its rate to 1.25%-the highest level since 1995-yet the yen fell instead of rising.

The Bank of England kept its interest rate at 3.75%, even though three of the nine Monetary Policy Committee members voted for a hike.

The Fed's decision on September 16, 2026, to raise the federal funds rate to 3.75%-4% was followed in the ensuing days by decisions from other central banks, as covered in the "BURSA" articles published on Friday: "Fed raised interest rate to 3.75%-4%: how the decision reaches the Gulf, India, China, and Romania" and "Fed raises interest rate for the first time since 2023; Trump claims the interest rate should have been nearly four times lower-[events that] had not offset them: the Bank of Japan's (BoJ) interest rate hike on September 18 and the Bank of England's (BoE) decision to hold rates steady on September 17.

• Bank of Japan raises rates, but the yen falls

The BoJ raised the uncollateralized overnight rate by 25 basis points to 1.25% during its September 17-18, 2026 meeting, according to the Bank of Japan's statement. Citing AFP, "BURSA" reported that same day that Japan had raised interest rates to their highest level in 31 years.

The BoJ's policy rate thus stands at its highest level since April 1995, according to Trading Economics. The BoJ's policy board voted 7 to 2 in favor of the move; Toichiro Asada and Ayano Sato voted to keep rates unchanged, according to CNBC.

The BoJ accelerated the pace of hikes: the September increase came just three months after the June hike-the shortest interval between two Japanese rate hikes since 1990, notes Trading Economics.

The yen fell rather than rose following the decision; the dollar exchange rate climbed above 157 yen, according to CNBC. Experts cited by CNBC attributed the yen's decline to the split vote within the BoJ board, which suggests the bank will not adopt an overly restrictive stance. Babypips cites a second reason: Governor Kazuo Ueda gave no signal regarding future rate hikes. The spread between the Fed's upper interest rate limit of 4% and the BoJ's rate of 1.25% is 2.75 percentage points-the same gap as before the two decisions, when the Fed's upper limit was 3.75% and the BoJ's rate was 1%. According to Babypips, this interest rate differential keeps the "carry trade" attractive-that is, borrowing in yen to purchase higher-yielding assets in other currencies-and the carry trade keeps the yen weak even following an interest rate hike in Japan.

• Bank of England holds interest rate in split vote

The Bank of England's (BoE) Monetary Policy Committee (MPC) voted 6-3 to keep the base rate at 3.75%, according to a statement published by the BoE on September 17, 2026. Three MPC members-Megan Greene, Catherine L. Mann, and Huw Pill-voted to raise the base rate by 25 basis points to 4%, the BoE statement shows.

The BoE base rate has stood at 3.75% since December 2025, and the September decision marks the sixth consecutive time the rate has been held at this level.

Annual consumer price inflation in the UK rose to 3.1% in August, driven largely by energy prices, according to the BoE statement.

The BoE statement notes that the prolonged conflict in the Middle East has led to further increases in crude oil and refined product prices since the previous meeting, with prices remaining more volatile and higher than pre-conflict levels. The BoE projects that UK inflation will continue to rise in the coming quarters.

The 6-3 vote reflects two differing approaches within the MPC. The majority of MPC members believed that current financial conditions would continue to drive down inflation and that maintaining the base rate was appropriate for this meeting, according to the BoE statement. The three members who voted for a hike cited the risk that rising energy costs could continue to feed through into prices and wages. The BoE statement warns that if the conflict in the Middle East persists for an extended period-and this risk increases-the Bank will likely need to raise the base rate.

At the same meeting, the MPC voted unanimously to reduce the portfolio of UK government bonds held for monetary policy purposes to zero by 2034, with an average annual reduction of £46 billion, according to the MPC meeting minutes.

The BoE's next decision regarding the base rate is scheduled for November 5, 2026.