News of the week summary - 21/12/2025

Bank of Japan lifts rates to highest level in three decades

The Bank of Japan has raised interest rates to their highest level in 30 years, marking another decisive step away in the country’s long exit from ultra-loose monetary policy. The central bank increased its policy rate by 0.25 percentage points to around 0.75 percent, a move aimed at responding to rising prices and stronger wage growth. The decision was unanimous and was widely expected by markets after clear signals from policymakers in recent weeks.

This rate increase is part of a broader normalization process under governor Kazuo Ueda, who has overseen four rate hikes since taking office. For decades, Japan kept interest rates near zero or below in an effort to fight deflation, a period marked by weak demand and falling prices. The latest move reflects confidence that inflation is now more durable and that the economy can tolerate higher borrowing costs.

Bond markets reacted immediately. The yield on Japan’s benchmark 10-year government bond rose above 2 percent, reaching its highest level since 1999. Bond yields move in the opposite direction to prices, so rising yields indicate that investors are demanding higher returns as interest rates increase. Yields had already been climbing in anticipation of the decision, fueled both by expectations of tighter monetary policy and concerns about Japan’s public finances.

Despite higher interest rates, the yen weakened against the US dollar following the announcement, falling to around ¥156.8. This outcome surprised some investors, as higher rates typically support a currency by making it more attractive to hold. Traders suggested that the yen’s decline reflects worries about Japan’s fiscal outlook, particularly under Prime Minister Sanae Takaichi’s plans for expansive government spending, which will be financed by issuing large amounts of new debt.

Governor Ueda sought to balance expectations in his remarks. He said the new policy rate remains well below the central bank’s estimate of the neutral rate, which is the level of interest rates that neither stimulates nor slows the economy. He emphasized that this neutral level is uncertain and exists within a wide range, meaning the BoJ intends to proceed cautiously and assess how the economy and inflation respond to each rate increase.

Market participants noted that the BoJ avoided surprising investors this time. A less clearly signaled rate hike in mid-2024 had triggered sharp market volatility, and policymakers appeared keen to prevent a repeat. Analysts said Ueda avoided sounding too aggressive, which could unsettle government finances, while also steering clear of language that might weaken the yen further.

Looking ahead, investors are divided on how far the BoJ will go. Some believe markets may be underestimating the potential for more tightening next year, especially if inflation and wage growth remain strong. The combination of rising bond yields, a weaker currency, and fiscal expansion suggests Japan is entering a more complex phase, where monetary tightening and government spending will interact in ways markets are still trying to price in.

US coal output boosts global demand near record levels

Global coal consumption is poised to reach near-record levels this year, driven largely by higher production in the United States, even as renewable energy sources continue to expand. According to the International Energy Agency, the world is expected to consume around 8.85 billion tonnes of coal, up slightly from last year. The increase highlights the ongoing challenge of reducing reliance on fossil fuels despite growth in solar, wind, and other clean energy sources.

In the United States, supportive political policies and exemptions for certain coal plants, combined with high natural gas prices, have encouraged coal-fired power generation. This has been a key factor pushing global demand upward, while Europe’s progress in cutting coal usage was slowed by lower wind and hydropower output, limiting the continent’s transition to cleaner electricity.

China, the world’s largest consumer of coal, is expected to maintain broadly flat demand this year, with gradual declines anticipated as the country rapidly expands its wind and solar capacity. However, the IEA cautions that these trends are uncertain; faster-than-expected electricity demand or slower renewable development could reverse the expected decline.

Looking ahead, the IEA predicts that global coal demand will plateau and fall modestly by 2030, with declines in the US helping offset increases in developing countries such as India and Indonesia. Across Asia, coal remains essential for electricity security and industrial processes, even as its share in overall power generation gradually decreases in favor of renewable sources.

The persistence of coal in the energy mix illustrates the tension between rising electricity needs and the transition to cleaner energy. While renewables are increasingly supplying the world’s power, short-term factors such as fuel prices, weather variability, and policy exemptions continue to sustain demand for one of the planet’s most carbon-intensive fuels.

ECB holds rates steady as stronger growth complicates inflation outlook

The European Central Bank has kept its benchmark interest rate unchanged at 2 percent for the fourth meeting in a row, signaling a pause after earlier rate cuts while emphasizing that future moves remain open. The decision was unanimous and matched economists’ expectations, reflecting a growing sense among policymakers that the eurozone economy is proving more resilient than previously feared.

ECB president Christine Lagarde said there was no discussion of either raising or cutting rates at this meeting. Instead, policymakers agreed that all options should remain available as economic conditions evolve. This cautious stance reflects an economy that is holding up better than expected, but where inflation risks have not fully disappeared.

The central bank upgraded its growth forecasts for the second time this year. It now expects the eurozone economy to expand by 1.4 percent this year, up from a previous estimate of 1.2 percent. Growth projections for 2026 and beyond were also revised higher. Lagarde pointed to stronger household spending, increased investment, and firmer exports in the third quarter, even in the face of new US tariffs. She added that domestic demand is likely to be the main driver of growth in the coming years.

Inflation, however, remains a delicate issue. Overall eurozone inflation stood at 2.1 percent in November, very close to the ECB’s medium-term target and within that range for nine consecutive months. Despite this progress, the ECB slightly raised its inflation forecast for 2026 to 1.9 percent. The revision reflects persistent price pressures in services such as housing, travel, and healthcare, which tend to be closely linked to wages rather than energy or global goods prices.

Service inflation has remained elevated for several years and recently picked up again, reaching 3.5 percent. Lagarde said policymakers were surprised by the latest increases and attributed them largely to stronger-than-expected wage growth. While the ECB expects wage pressures to ease gradually next year, the uncertainty surrounding this outlook has made policymakers reluctant to commit to further rate cuts.

This explains the ECB’s balancing act. On one hand, borrowing costs have already fallen to their lowest level since late 2022 following a series of cuts that began in mid-2024. On the other hand, inflation risks, particularly in services, mean the central bank does not yet feel comfortable easing further. Analysts broadly agree that there is no immediate case for either tightening or loosening policy.

Financial markets interpreted the message as confirmation that the ECB may be done cutting rates. Traders in interest rate derivatives now see only a small chance of a rate increase by the end of 2026, while the euro edged slightly lower against the dollar after the announcement. Overall, the decision underscores a shift from fighting high inflation to managing a more nuanced environment where growth is improving but price pressures have not fully settled.

US unemployment rises to four-year high

The US unemployment rate climbed to 4.6 percent in November, the highest level in over four years, signaling growing weakness in the labour market. While the economy added 64,000 jobs last month, this came after a significant loss of 105,000 positions in October, largely due to cuts in federal government employment. Overall, the pace of job creation has slowed sharply, with hiring averaging just 22,000 per month over the past three months.

The increase in unemployment was influenced by a rise in teen joblessness, from 13 percent in September to 16 percent in November, and ongoing government layoffs, which have cut federal employment by more than 270,000 since January. Private sector hiring, however, has remained steadier, with 121,000 jobs added over the past two months, indicating that businesses continue to employ workers even as government positions shrink.

This mixed labour market picture adds to the Federal Reserve’s challenge in balancing its dual mandate of low inflation and full employment. Policymakers recently cut interest rates for the third time this year to a three-year low, prioritizing concerns about a slowing jobs market over persistent inflation. The rising unemployment rate reinforces the argument among “dovish” Fed officials that further rate cuts may be necessary to support the economy.

The report also carries political significance. President Donald Trump has publicly urged the Fed to lower borrowing costs, and the data may strengthen calls for additional easing. Financial markets reacted modestly, with short-term US government bond yields slipping slightly; for instance, the two-year Treasury yield fell to 3.49 percent.

While the headline unemployment number highlights the labour market’s fragility, analysts note that steady private hiring tempers concerns. The figures suggest the economy is losing government jobs more quickly than expected, but businesses are still hiring, leaving the overall employment picture nuanced.