Swati Dhingra from the Bank of England’s Monetary Policy Committee stated that central bank policies have limited effectiveness against trade-based supply shocks affecting prices. She emphasised that monetary measures alone cannot adequately manage price impacts in sectors like energy and food.

In a scenario where the world economy fragments cautiously, a response from monetary policy may not be necessary. The need for an independent monetary authority with a clear inflation target increases when external supply shocks are more common.

US tariffs are anticipated to strengthen the US Dollar, which could temporarily raise prices in the UK. However, the direct impact on UK inflation from US import costs and the stronger Dollar is likely to be neutralised by decreased global price pressures.

Swati’s comments bring attention to an issue we have observed over time: monetary tools do not work well when price changes are driven by supply disruptions rather than demand. Interest rate adjustments cannot create more oil or grain, so economic policymakers must focus on managing inflation expectations rather than attempting to directly offset cost increases in these areas.

If trade tensions cause world economies to separate but in a measured manner, sudden policy shifts might not be required. However, frequent supply disturbances make a clear inflation mandate even more valuable. When external shocks cannot be controlled through rate changes alone, investors should be mindful that inflation expectations could remain more volatile, impacting longer-term rate decisions.

With US import duties on the rise, the Dollar is expected to gain strength. This could push prices higher in Britain for a short period, particularly for goods priced in Dollars. However, broader inflation effects should balance out as reduced global demand weighs on input costs. For traders watching derivatives, this means positioning should account for near-term currency movements but also recognise that the longer-term inflation impact may not be as straightforward. Understanding where price changes come from helps in anticipating whether central banks will act—or if they will maintain their stance and wait for external pressures to ease.