Good afternoon and welcome to another episode of BondTV. I’m Leslie Clark. Over the past two years,the dominant question for borrowers was how quickly interest rates would fall. Now, that question has changed. Inflation has reaccelerated, long-term yields are near multi-decade highs, and several major central banks are tightening policy again.
In September, the global rate story shifted from easing to divergence, and, increasingly, renewed tightening. The Federal Reserve, Bank of Japan, and European Central Bank have all raised rates, while the Bank of Canada and Bank of England remain on hold. Behind the shift is a combination of resilient demand, higher energy costs, trade friction, and renewed concern that inflation may stay above target longer than expected.
On September 16, the Federal Reserve raised its target range by 25 basis points to 3.75% to 4%, its first rate increase since 2023. The vote was unanimous. The Fed described economic activity as expanding at a solid pace, with resilient spending, strong productivity and robust capital investment, while inflation remains elevated. The new projections are equally important. The median federal funds rate is 4.1% at the end of both 2026 and 2027, implying that policymakers do not expect a quick return to the low-rate environment of the last decade.
Canada is taking a different path. On September 2, the Bank of Canada held its overnight rate at 2.25%. Canadian growth has improved, with real GDP rising 0.8% in the second quarter, but inflation is again running at 3%. The Bank noted that higher energy prices and renewed U.S.-Canada tariffs create upside inflation risk even as the growth outlook remains uncertain. For Canadian borrowers, that means the Bank may stay on hold even as U.S. rates move higher, widening the gap between the two countries.
Across the Atlantic, the picture is also diverging. The ECB raised its three key rates by 25 basis points on September 10, citing persistent inflation pressure from the Middle East conflict and projecting headline inflation of 3% for 2026. The Bank of England, by contrast, held the Bank Rate at 3.75% on September 17, but the vote was 6–3, with three members preferring an immediate hike to 4%. U.K. inflation reached 3.1% in August, and the Bank warned that inflation risks are tilted further to the upside.
Japan is moving in the same general direction, but from a much lower starting point. On September 18, the Bank of Japan raised its policy rate by 25 basis points to 1.25%, its highest level in 31 years. The decision passed by a 7–2 vote, with two members preferring to hold at 1%. The move reflects growing concern that inflation could overshoot the Bank’s 2% target and marks another step away from decades of ultra-low interest rates.
The bigger story is that the synchronized easing cycle has broken down. The Bank of Canada is still at 2.25%, but the Fed has moved back up to 3.75% to 4%, the ECB has resumed tightening, and the Bank of Japan has now raised its rate to 1.25%. In the U.S., the latest Fed projections show a 4.1% median policy rate at year-end 2026 and again in 2027. At the same time, August U.S. CPI rose 3.4% year over year, while Canadian CPI was 3%. Inflation is no longer moving cleanly toward target, and central banks are responding differently depending on domestic growth and price pressures.
So what does this mean for small and mid-sized businesses? The key point is that a lower overnight rate does not necessarily mean cheaper financing. Canadian borrowers have benefited from Bank of Canada cuts, but benchmark long-term yields, lender spreads and company-specific credit risk still determine the all-in cost of capital. Strong companies continue to have financing options, while businesses with weaker cash flow or aggressive leverage may face tighter structures, higher pricing, or less capacity than they expected when the easing cycle began.
As we look beyond central-bank headlines, there are three market signals worth watching: Long-term yields have become the story. The U.S. 10-year Treasury recently moved through 5%, levels not seen since 2007, even before settling back below that mark. For businesses, that matters because fixed-rate loans, corporate bonds and many longer-duration financing products are priced off the long end of the curve, not simply the overnight rate. A central bank can cut short rates while longer-term borrowing costs remain stubbornly high.
Energy is again a major inflation variable. Brent crude has traded above $100 per barrel during the Middle East conflict, raising transportation, manufacturing and input costs well beyond the energy sector itself. The question is no longer just whether oil prices rise, but how long higher energy costs persist and whether businesses pass them through to customers.
Credit conditions also deserve attention. Private credit remains an important source of capital, but stress is becoming more visible in parts of the market. U.S. BDC non-accruals rose to 3.4% of portfolio cost by mid-2026, with software among the areas experiencing the greatest markdowns. Capital is available, but prudent lenders are becoming more selective about where they take risk.
For business owners, the lesson is not to build a financing plan around the assumption that rates will simply keep falling. The cost of capital is being shaped by inflation, long-term bond yields, tariffs, energy prices and company-specific credit quality. In this environment, financing flexibility matters. Matching the structure, maturity and repayment profile to the business can be just as important as the headline interest rate.
Thank you for joining us on another episode of Bond Capital TV. Whether you’re an operator, investor, or advisor, staying informed is your best defense in uncertain times.
We hope you found today’s insights valuable. I’m Leslie Clark for Bond Capital, and we look forward to seeing you next time.
