Energy shock enters its second round and central banks cannot look through

Energy is now written into the decision

The Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 4.60% on 29 September, and the decision was unanimous. According to Al Jazeera, this is the highest rate since 2011 and the fourth increase of 2026. The statement spelled out 2 reasons: the conflict in the Middle East has widened and global energy prices have risen sharply. Annual inflation stood at 3.5% in July, above the bank's 2–3% target range.

Central banks usually respond to an energy shock by looking through it. They treat a 1-off price rise as temporary and leave rates untouched. That stance cannot hold once second-round effects begin. The second round is the stage at which the energy price rise spreads into wages and services prices. Spain's flash estimate of 29 September shows that spread: annual inflation rose from 4.3% in August to 4.9%. The EU-harmonised index, at 5.0%, is at its highest level since February 2023. According to Euronews, energy products rose by 21.6% year on year. Services also rose by 3.9%, and core inflation climbed to 3.1%.

Markets are pricing October and November

In the United Kingdom the 10-year government bond (gilt) yield rose to 5.42% on 29 September and is trading close to its highest level since July 2007. According to Trading Economics, the yield has risen by 27 basis points over the past 1 month. Bank of England (BoE) Deputy Governor Dave Ramsden kept the possibility of a hike open on 28 September and ruled out easing in the near term. Markets assign an 85% probability to a 25 basis point increase in November from the current policy rate of 3.75%. According to the same source, roughly 4 hikes are priced in by mid-2027.

In the United States the Fed raised rates by 25 basis points on 16 September. Futures assign a 68% probability to a second step at the 28 October meeting. According to IBTimes, that probability was 55.4% 1 week earlier. The 2-year Treasury yield, the maturity most sensitive to policy rates, closed at 4.93% on 29 September, its highest in more than 2 years. The first test is the personal consumption expenditures price index, or PCE, which the Fed tracks. The August figure is expected on 30 September. According to Investing.com, the headline rate is expected to stay at 3.7% year on year and the core rate to ease to 3.2%.

The far end of the curve and Japan point the same way

The US 30-year Treasury yield rose to 5.57% on 29 September. According to Trading Economics, longer-dated yields are at their highest level since 2007. On 9 September the Treasury announced 6 billion dollars of buybacks for bonds with 10–20 year maturities, and the yield that day was 5.309%. A buyback is the Treasury repurchasing its older bonds from the market. Since that date the yield has risen by a further 26 basis points or so. This picture suggests the market is pricing inflation and the budget deficit rather than 1 liquidity tool.

In Japan the 2-year yield reached 1.975% on 28 September, its highest level since 1995. The Bank of Japan's (BoJ) policy rate is 1.25% and the market is pricing the next step at 1.5%. Tokyo Tanshi puts the probability of an October increase at 36%, while 1 increase by December is almost fully priced. According to Trading Economics, as of 30 September the 10-year yield stands at 3.10% and the 30-year yield at 4.18%. The cost of the yen, a low-rate funding source for decades, is therefore also being priced above 1.25%.

The rate differential is the first link to break

Emerging-market currencies are paying the first price of tightening. The Mexican peso lost 1.74% against the dollar on 28 September. USD/MXN rose to 18.04 on 29 September, moving above 18 for the first time since early April. Banxico's rate is 6.50% and the Fed's range is 3.75–4.00%. The gap between them has narrowed to 2.5 points, from roughly 6 points at the post-pandemic peak. A carry trade means borrowing at a low rate and investing in a higher-yielding currency, and it loses its appeal as the gap falls towards 2.5 points.

The sell-off was not confined to one country. According to the Rio Times, on 28 September the Brazilian real lost 0.86%, the Chilean peso 0.71% and the Colombian peso about 1.5%. The same source attributed the selling to 2 factors: the US 10-year yield rising to 5.244% and a higher oil price. Banxico's governor said the floating exchange rate was acting as a buffer and gave not even 1 signal of intervention.

The contradiction for Türkiye and what to watch

Fitch Senior Director Douglas Winslow said on 29 September that 150 basis points of rate cuts were possible by year-end. Türkiye is rated BB- with a stable outlook. Fitch projects year-end inflation of 30.5% and a dollar rate of 51 lira. Market data sit uneasily with that 150 basis point projection. According to Investing.com, the 2-year benchmark yield was 37.03% on 29 September, above the 37% policy rate. The country's 5-year credit default swap (CDS), the insurance premium against the risk of non-payment, stood at 249.98 basis points on 28 September.

If the CBRT cuts by 150 basis points while the Fed raises by 25 basis points on 28 October, the rate differential narrows from both ends at once. The Mexican case shows that a fall from roughly 6 points to 2.5 points carried the exchange rate above 18. With a 37% policy rate, Türkiye's differential is far wider, yet the dollar closed at 49.03 lira on 29 September. Fitch's 51 lira forecast implies a further rise of about 4% from that close.

There are 3 indicators for the next 4 weeks: the PCE figure on 30 September, Spain's final inflation reading on 14 October and the Fed decision on 28 October. If all three confirm tightening, the room for a 150 basis point cut narrows and the 2-year yield stays above 37%. This is not a forecast but a conditional reading that depends on 3 data points.