Vanguard’s economic update: Interest rates move higher

The global economy has held up relatively well, but higher energy prices are adding to inflation¹. Central banks in the US, euro area and Japan have recently raised interest rates.

Here’s what our economists are focusing on in the world’s major economies.

United States

Growth remains healthy, helped by strong business investment and steady consumer spending. The jobs market also remains broadly stable. Inflation is still high at over 3%, prompting the Federal Reserve (the US central bank) to raise interest rates by 0.25 percentage points in September. 

Key points

• We expect US economic growth of 2.3% in 2026 and 3% in 2027.

• Business investment has been strong and we expect this to continue.

• We have lowered our forecast for the year-end 2026 unemployment rate slightly, from 4.6% to 4.4%.

• We expect one more interest rate rise by the end of the year, taking rates to 4.1%.

United Kingdom

Growth was steady during the first half of the year, helped by the services sector and stronger business investment. However, we expect growth to slow during the rest of 2026 due to higher energy and borrowing costs. Households continue to expect inflation to stay high, most likely because it has not fallen below 2% since the outbreak of the Ukraine war. The jobs market is showing signs of stabilising after a period of weakness. 

Key points

• We continue to expect UK economic growth of 1.1% in 2026, although it could be slightly higher.

• We now expect one more interest rate rise this year, to 4%, followed by another 0.25 percentage points next year.

• Higher energy prices are leading to higher inflation. We have increased our forecast for headline inflation to 3.5% by the year-end, with core inflation (which excludes food and energy costs) at 2.6%.

• We expect unemployment to end the year at 5.3%.

Euro area

The euro area economy has held up better than expected despite higher energy prices. Growth is on track to be above our forecast of 0.8% for 2026, helped by domestic demand.

Key points

• We expect economic growth of 0.8% in 2026, rising to 1.3% in 2027.

• Unemployment remains stable at 6.4%, although there are big differences between countries.

• We expect core inflation to end the year at 2.5%.

• The European Central Bank raised interest rates to 2.5% in September. We expect a further interest rate rise this year and another in 2027 as higher energy prices keep inflation risks elevated.

Japan

Japan’s economy continues to grow at a steady pace, helped by exports, rising wages, recovering consumer spending and business investment. 

Key points

• We expect Japan’s economy to grow by 0.8% in 2026 and 1.2% in 2027.

• Strong wage growth is helping to support consumer spending, but it’s also adding to inflation.

• We expect core inflation to end 2026 at 2.1%.

• The Bank of Japan raised interest rates to 1.25% in September. We expect one more increase this year, taking the rate to 1.5%.

China

China’s economy weakened during the third quarter. Exports have remained strong, helped by the growth of artificial intelligence and demand for technology-related products. However, spending and investment within China has been weaker. 

Key points

• We expect China’s economy to grow by 4.7% in 2026 and 4.8% in 2027.

• Exports remain an important source of growth, although rising trade tensions and weaker global demand could cause challenges.

• China’s property market remains weak overall but there are some early positive signs.

• We expect the People’s Bank of China to continue supporting the economy, although interest rate cuts look less likely in the near term.

All facts and figures from Vanguard analysis, September 2026.

¹ Inflation is the rise in prices for goods and services over time, meaning your money buys less than it used to.

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