Twenty-four hours have passed, and we are still trying to figure out why the Bank of England raised interest rates.

The meager 15 basis point rise to 0.25% is too small to have any impact on the economy. It can hardly compensate for the drop in real interest rates caused by the recent sharp rise in inflation. Although for the owners and workers of the British service industry, facing the latest surge in Covid cases, they are worried about their livelihoods, but this may feel like a kick.

Instead, the decision was motivated by the desire to anchor inflation expectations near the Monetary Policy Committee’s 2% target-a feat given the current inflation rate of 5.1%. Although this interest rate hike is modest, the idea is that by showing the direction of travel (and willingness to use interest rates as a policy tool), people will expect further interest rate hikes in the new year.

However, to achieve this Jedi thinking technique requires credibility.

The lack of consistency between MPC’s recent remarks and what it did in the November and December voting has left the market unable to clearly understand how to interpret the policymakers’ statements. The old lady once again proved that she is an unreliable boyfriend. Coupled with our current climate, which is full of uncertainty, we don’t believe that the market will take seriously the cues of a stable climb to the curve. At least not behind a small incision like this.

However, the more fundamental problem is that the United Kingdom is struggling to cope with inflation that its central bank officials are powerless. The main reason for the price increase is the increase in energy costs. Another source is the chaos in the global supply chain. Both of these factors are factors in which Putin and Spike Protein have more say than banks.We stay Not convinced The recent surge is affecting the labor market. Britain is not the United States.

The supply-side inflation problem will not go away.

China has Confirmed Omicron case, The factory may be closed. Even if the pandemic becomes an endemic disease, we are also facing the dual threat of more frequent extreme weather events and an aging population.Climate change may affect crop yields Like cottonThe past year has given us some insights into how labor shortages affect production. It can be reasonably expected that the structural forces that restrain prices in recent decades, such as the impact of Chinese labor and production on globalization, will also weaken.

The possible result is more volatility in output and prices.

Monetary policy is not entirely useless in managing hyperinflation.But its owner should treat it more honestly degree They can now hope to achieve stability and prosperity through this channel alone. Currency prices are the only thing central bank officials can really influence. Don’t get us wrong-currency is obviously important for inflation. But in times of global outbreaks and climate change, supply shocks may be equally important. If not more.

However, acknowledging this will weaken the power of decision makers. Acknowledging the impact on currencies-although it is huge-may not be able to control inflation, which will force them to admit that inflation may be attributed more to the price pressure itself than to the credibility of those responsible for controlling them.Economist Jeremy Rudd makes a strong case here Because it is believed that what really matters is inflation itself, not the goals set by policymakers—and their impact on what people think will happen in the future.

The Governor of the Bank of England Andrew Bailey and other central bank clergymen, Dismissed Rudd’s viewsInstead, they chose to stick to their textbooks and claimed that small interest rate hikes would change behavior by changing inflation expectations and temporarily causing prices to spike.

This makes sense, because if Rudd is proven correct, the entire knowledge framework on which the central bank has been based over the past 30 years will collapse. The foundation has been shaky. A global financial crisis, the following ten years characterized by weak official inflation data and soaring asset prices, has made many people suspect that there is a problem with a system that claims to be able to delegate central bank governors to achieve stable growth. If people and companies no longer think they can control inflation, then we suspect that the era of omnipotent, independent currency guardians is over.

So we have the answer. The interest rate hike on Thursday was about Threadneedle Street persuading their critics that the central bank still has the power to manage the economy.

Maybe time will prove that MPC is correct. We will review yesterday’s interest rate hike, which is the first in a series of major measures to control price pressure. However, we fear that they are wrong. They may be lucky and benefit from the decline in inflation in the second half of next year, for which they can apply for credit. In our opinion, this is more likely. But in the end, we suspect that they will be discovered.