00:13 During the 1970s, central banks often set their policy rates below the rate of inflation, hoping that inflation would just go away by itself without them having to take drastic action. The problem is that hope isn't a strategy, and keeping policy rates below the rate of inflation didn't work.

00:32 Inflation continued to spiral higher until central banks put their interest rates in positive territory in real terms in 1980, raising it above the rate of inflation.

00:44 The Bank of England currently has its policy rate at 4.25%.

00:49 Core inflation is running at 6.2%.

00:52 That means that in real terms UK rates are 200 basis points below core inflation.

00:59 From the perspective of headline inflation, things are even worse.

01:03 Overall, UK inflation is running at 10.1%. That's nearly 6% above the BOE's policy rate. The problem is twofold.

01:13 If the BOE keeps rates below inflation, inflation could continue to spiral higher.

01:19 On the other hand, if they raise rates above inflation, that means that they might need to raise rates at least another 200 basis points, which could create severe financial distress in an economy where most mortgages are floating rates and where debt levels have risen in recent decades.