During the Bank of England's "dove-hawk debate", the Federal Reserve rekindles expectations for interest rate hikes.

This Monday, Alan Taylor, a member of the Bank of England's Monetary Policy Committee, made it clear that the current interest rate level of 3.75% is already restricting the economy and there is no need to raise rates to deal with the inflation pressure caused by the Iran war. "I am comfortable with the current interest rate level unless the worst-case scenario happens," Taylor said in an interview broadcast on Monday. Meanwhile, on the other side of the Atlantic, the Federal Reserve seems to be heading in the opposite direction, with strong employment data and stubborn inflation putting a rate hike back on the table for the end of the year. The divergence in the paths of the two major central banks is unfolding in front of global investors. The root of this monetary policy divergence can be traced back to the end of February when the US launched a military strike against Iran. In response, Iran effectively blocked the Strait of Hormuz, which usually carries about one-fifth of the global oil and gas shipments. International Energy Agency data shows that due to the closure of the strait, oil production in Gulf countries is 14.4 million barrels below pre-war levels, leading to an average global oil supply loss of 12.8 million barrels per day. Brent crude oil prices soared from around $70 per barrel before the war to above $100 per barrel, and UK wholesale natural gas prices rose by about 75%. The World Bank forecasts a 24% increase in global energy prices by 2026, with overall commodity prices rising by 16%. The IMF has revised its global inflation expectations for 2026 from 3.8% to 4.4% and warned that in a severe scenario, global inflation rates could approach 6%. For the UK, Bank of England staff predict inflation could rise to 3.5% in the next two quarters, while analysts estimate that inflation peaks based on recent energy prices could reach 4% to 5%. Internal rift in the Bank of England: Taylor's "dove" vs. Green, Peirce's "hawk" Faced with this inflation storm, the Monetary Policy Committee of the Bank of England is divided internally. Taylor, as the most staunch advocate for rate cuts in the committee, had called for easing policy several times before the war. In January of this year, he forecast that UK inflation would return to target in mid-2026 and believed that the Bank of England could further cut rates. In late May, he further stated that if the situation in the Strait of Hormuz did not worsen and oil prices did not spike, a simple "extension of rate holding may be enough to address the current situation." However, the hawkish voices are also loud. Monetary Policy Committee member Megan Green stated clearly in an interview last week that "as the conflict continues, the case for raising rates is strengthening, and monetary policy may need to be tightened in the coming weeks or months." Green revealed that she had considered voting for a rate hike at the last meeting, which ended with an 8-1 vote to keep rates unchanged, with the only vote for a rate hike coming from the Bank of England's chief economist, Hugh Pierce. "Even if it turns out that inflation is not as persistent as expected, the risks of raising rates are far lower than the risks of not taking action," Green warned, noting that inflation has exceeded the central bank's target for 7 years out of the past 10, and businesses and households may view high inflation as a "new normal," requiring a stronger policy response. Another committee member, Catherine Mann, also believes that the Bank of England should consider "a longer pause in rates and even a rate hike at some point in the future." This internal division at the Bank of England contrasts sharply with the unanimous 9-0 vote to keep rates unchanged last month. Taylor's "high threshold" statement suggests that there may be the most intense debate within the committee since the outbreak of the Iran war at the next monetary policy meeting on June 18. Federal Reserve accelerates turn: shocking reversal from three rate cuts to rate hike within the year More noteworthy than the internal division at the Bank of England is the drastic shift that the Federal Reserve has experienced in recent months. Just in January of this year, the market widely expected the Fed to cut rates up to three times within the year. However, strong employment reports, AI infrastructure investment trends, and the energy shock from the Iran war have almost completely reversed this picture. Interest rate futures markets have fully priced in the possibility of a rate hike before the end of the year, completely reversing previous rate cut expectations. Nick Timiraos, a journalist often referred to as the "new Fed communication agency," pointed out that newly appointed Fed Chairman Kevin Wash, who has just been in office for two weeks, faces pressure from both the market and the White House. Traders have already priced in the possibility of a 25 basis point rate hike before December and believe there is about a 16% chance of a second rate hike. Loretta Mester, President of the Cleveland Fed, voted against the wording in the policy statement that "indicated the next cut" in last month's meeting, and she recently stated, "if current trends continue, action may be needed soon," hinting at preparations for a rate hike at the end of July. Dallas Fed President Robert Kaplan also expressed a preference for a rate hike later in the year. Goldman Sachs has completely abandoned its forecast for rate cuts this year. Even more dramatic is the political game at play. Trump openly called for a rate cut in an interview last Sunday, saying "there is no reason to raise rates," and emphasizing "we should actually lower rates." The target of his pressureWash, is ironically the newly appointed chairman whom Trump personally nominated and was confirmed by the Senate just last month. Internally, the Trump administration's stance is also divided: Treasury Secretary Janet Yellen is leaning towards the Fed "waiting for some more clear signals," while Trump repeatedly emphasizes the Fed's good chairman Wash and argues that a strong economy should not be "punished" by rate hikes. Faced with pressure from the president, rising inflation, and market expectations of rate hikes, Wash will make a decision at the first monetary policy meeting on June 16-17. The Federal Reserve is rapidly shifting from expectations of rate cuts to rate hikes, while the Bank of England is likely to choose to hold steady and assess the situation. Analytical agencies point out that the divergence in monetary policy between the UK and the US is moving from the level of interest rate levels to the level of policy determinationthe hesitation of the Bank of England and the shift of the Federal Reserve will shape the core trend of short-term rates in 2026.