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Daily Economic Update
18.09.2025US: Fed delivers a 25 bps “risk management cut” with the dot-plot and Powell indicating high uncertainty about future cuts. The FOMC reduced the Fed Fund Target rate by 25 bps to the 4.0-4.25% range in an 11-1 vote, with just-appointed Governor Stephen Miran the lone dissenter and pitching for a larger 50 bps cut. The FOMC statement cited that “downside risks to employment have risen” as “the unemployment rate has edged up but remains low” but also saw inflation moving up and remaining “somewhat elevated.” In updated dot-plot projections, members penciled in two more rate cuts this year (an additional one versus June’s projection) and one each in 2026 and 2027 (unchanged from before), with the longer-run rate steady at 3%. GDP growth was seen improving to 1.6% in Q425 (from 1.4% earlier) and 1.8% in Q426 (from 1.6%), and PCE inflation forecasts were somewhat revised higher to 3.0% in Q425 (no change) and 2.6% in Q426 (from 2.4%), before returning to the Fed’s 2% goal only in 2028. Interestingly, despite stating higher risks to the job market, the median projection for the unemployment rate was unchanged for Q425 at 4.5% but lower in Q426 (4.4% versus 4.5% earlier) and Q427 (4.3% versus 4.4%). In his post-meeting conference, Chair Powell mentioned risks to the Fed’s inflation as well as employment mandates. He underscored weakening labor market conditions with slowing job gains, attributing that mostly to the supply side given the stricter immigration policies. On inflation, he reiterated his previous remarks that the base-case is for tariffs to lead to a one-time increase in prices. Highlighting these challenges, he characterized the policy decision as “a risk management cut” and continued to emphasize data dependency and following a meeting-by-meeting approach, which effectively does not put the Fed on a preset path to cut rates. Moreover, despite the dot plot showing two more rate cuts this year, the split was tight with only 10 out of 19 members favoring that. Besides, seven members do not see any further cuts this year. All this indicates that the market’s expectation of further cuts ahead comes with a high degree of uncertainty, especially given that economic activity remains resilient. This was also evident in the market reaction yesterday, with the S&P 500 struggling for direction following the decision and during Powell’s conference, closing 0.1% d/d down, the UST 10Y yield rising, and the price of gold falling.
UK: CPI inflation unchanged at elevated levels, but core price rises moderate, matching expectations. CPI inflation in August was steady at its 19-month high of 3.8% y/y but the core rate softened to 3.6% from 3.8% in July, with both coming in line with consensus forecasts. Airfares partially reversed the surge seen in July after a shift in school summer holiday travel timings but were offset by higher prices in restaurants and hotels, motor fuels, food, and alcoholic beverage categories. Goods inflation inched up to a 22-month high of 2.8% y/y from 2.7% but services inflation expectedly eased to 4.7% after rising to 5% in July. On a monthly basis, both headline and core prices increased by 0.3%. The BoE expects headline CPI inflation to accelerate to a peak of 4% y/y in September. Overall, there were no major surprises in the latest inflation prints, keeping market expectations about the policy interest rate path mostly intact. The BoE is seen maintaining the benchmark bank rate at 4% later today after narrowly reducing it by 25 bps in the previous meeting.
Japan: Trade deficit expands but lower than forecast as exports remain weak. Japan’s Ministry of Finance announced that the country’s trade deficit widened to ¥243B in August (from ¥118B in July), the fourth deficit in five months. Exports posted their fourth straight month of declines, but at a much softer pace of just 0.1% y/y, beating forecasts and improving from July’s 2.6% fall as US trade uncertainty continued to affect external demand. Unsurprisingly, exports to the US fell 13.8% y/y but shipments to Asia (1.7%), the Middle East (5.2%) and the European Union (5.5%) all increased relative to last year. The newly signed US-Japan trade deal, which set a flat 15% tariff rate on most Japanese exports, including autos, should help improve US-bound export prospects in future. Imports also extended the downturn in August, coming worse than the consensus estimate, with a fall of 5.2%, though narrowing from the 7.4% drop seen in July.
Kuwait/GCC: Central banks follow US Fed in cutting interest rates by 25 bps. The Central Bank of Kuwait (CBK) and its peers in the GCC followed in step with the US Fed last night, lowering their benchmark interest rates by 25 bps for the first time this year. For the CBK, Wednesday’s cut in the key discount rate to 3.75% from 4.00% was only the second cut since the Fed embarked on its monetary easing cycle last September, bringing the cumulative reduction in local rates to 50 bps compared to 125 bps for US interest rates. In its communique explaining the decision, the CBK highlighted the decline in consumer price inflation in Kuwait to 2.4% y/y (July 2025) from 3.0% over the last twelve months, the relative stability of the KWD against a basket of major currencies and the growth in deposits in the banking system of 4.2% y/y (July 2025). The CBK reiterated its commitment to maintaining monetary and financial stability with its “prudent and balanced approach”, a signal that the central bank may continue with its gradual approach to monetary policy loosening ahead. GCC central banks, with their hard currency pegs to the US dollar, also followed in lockstep with the Fed. The Saudi central bank cut its benchmark repo and reverse repo rates by 25 bps to 4.75% and 4.25%, respectively, while the UAE central bank cut its base rate on the overnight deposit facility by 25 bps to 4.15%. The Qatar Central Bank lowered its deposit, lending and repo rates by 25 bps to 4.35%, 4.85% and 4.60%, respectively. Bahrain’s central bank cut its overnight deposit rate to 4.75% and Oman’s central bank reduced its repo rate also by 25 bps to 4.75%. Overall, the latest round of interest rate cuts in the monetary easing cycle will be welcomed by businesses and consumers and help boost regional non-oil economic activity especially.
Kuwait: Government development plan spending rate improves, but project execution remains weak. Government expenditure on development projects in the current fiscal year (FY2025/26) has accelerated, according to the General Secretariat of the Supreme Council for Planning and Development. In its recently published annual plan follow-up report, government spending on strategic projects in Q1 (April-June) came in at KD132.4 million, more than double the KD54.5 million spent during the same period last year (Q1 FY24/25). Still, actual outlays continue to lag in relation to the budgeted allocation, with only 10% rather than 25% of the pro-rated quarterly budget (KD325 million) delivered. The report noted that out of the 141 projects monitored, only half are currently in the execution phase, with about 70% lagging behind in their delivery timelines. Budget allocations are heavily focused on the “Building a Strong Infrastructure” pillar of the ‘New Kuwait’ development plan, accounting for 91% (KD1.2 billion) of total development allocations. But progress in executing flagship housing projects such as those under the Public Authority for Housing Welfare umbrella including the South Abdullah Al-Mubarak and Al-Mutlaa Cities as well as the Affordable Housing projects has been sub-par. The SCPD report has highlighted structural inefficiencies and impediments, such as the slow project contractual cycle as well as other technical challenges that have persistently delayed project execution.