Punching the face left and right, hiking or not? It's not just the Bank of England that's anxious

At the beginning of the Coen Brothers' classic movie", "Three Kings Of Escape", three fugitive heroes are trapped in a barn, surrounded by layers of law enforcement, and they complain, damn, we are in trouble.

This phrase is now best used to describe the situation of Bank of England Governor Andrew Bailey and eight of his colleagues on the UK's Monetary Policy Committee.

On Sunday, Pele sent a new signal that the Bank of England was preparing to raise interest rates as inflation risks rose. But Bailey said he still believes the recent surge in inflation will be temporary, so why adopt a tight monetary policy?

Inflation rose the most between August and September this year since the Bank of England began to set monetary policy independently in 1997. As of September, UK inflation reached 3.2%, up 1.2 percentage points from the previous month.

After Pele's remarks, the market believes that the UK rate hike is stable next month, and expects that the Bank of England may raise interest rates later this year or early 2022, and monetary policy will continue to tighten in the coming years.

<h2>It's hard not to raise rates</h2>

Bailey and other members of the Monetary Policy Committee are beginning to worry that inflation, while temporary, could end up lasting longer than expected, which will weaken banks' credibility. At the same time, in this case, there are increased fears that inflation expectations will rise sharply, which in turn will affect people's behavior and push up real inflation.

It's not just the Bank of England that's struggling, it's the banks of the world that's anxious about rising inflation caused by global supply shocks. But there is more uncertainty in the UK economy, with migrant numbers falling and reduced financial support through general credit cuts, fewer vacations and upcoming national insurance hikes, which are at greater risk than other countries.

In addition, there is a larger problem, with more theories for how central banks respond to demand shocks, but few theories for curbing supply shocks. As a result, central banks often fail when they respond to changes in demand, rather than changes in supply (temporary) without corresponding theoretical support.

Earlier, in 2011, the European Central Bank decided to raise interest rates in response to rising oil prices, which was widely seen as a serious policy mistake. Now, with little evidence that demand is driving inflation, the Bank of England is considering the same measure. Many investors believe they are repeating the mistakes of the past and making policy mistakes.

<h2>The difficulty of raising interest rates</h2>

Given the shortage of energy prices and labour in the UK economy, raising interest rates is also the right step.

In an interview with the Financial Times, Dominic White, an economist at Absolute Strategy Research, said people are now facing a "relative supply and demand problem", where people spend less on services, whether it's eating at restaurants or traveling on vacations, while spending more on durable goods, such as home electronics and cars. In short, overall demand has changed, not increased.

As White points out, the UK economy is a relatively open economy, with imports and exports accounting for more than 50% of GDP, and the epidemic has put huge pressure on supply, leading to higher prices. This, combined with trade policy adjustments and a spiral in global energy prices, eventually led to enormous chaos.

The Bank of England now faces a great threat, and supply shocks will last longer and more frequently. The COVID-19 pandemic, extreme weather events, and the government's response to climate change will all cause prices to continue to soar.

Dario Perkins, global macroeconomic manager at TS Lombard, believes that for nearly 20 years, everything has been related to demand shocks, and we live in a world dominated by demand rather than supply, and we should not act because of changes in supply.

This series of supply shocks brings the threat of runaway inflation expectations closer, but what is really troubling is whether a small rate hike can really solve the problem?

Richard Barwell of BNP Paribas Asset Management believes that several rate hikes will not satisfy anyone. There are too many rate hikes for those who think price increases are temporary, and too few for those who think the UK is re-entering the dark days of the 1970s (stagnant economic growth, soaring prices).

The Bank of England is now in a dilemma, not to raise interest rates, not to raise interest rates. At this point, perhaps whatever action is taken will fail, because there is nothing to remedy.

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