With one eye apparently on the threat of inflation, the Bank of England Monetary Policy Committee has been reluctant to embark on the type of rate cutting spree we have seen in the United States.  Instead, in Britain we have been teased with a mere quarter of one percent off base rates.

Dictating Monetary Policy, however seems no longer to be the preserve the Bank as lenders increasingly ignore official rates as they are buffeted by the effects of the credit crisis.  Lending rates which once moved in tandem with the base rate have now lost this linkage as mortgage lenders and others in the business of loans seek either to rebuild battered balance sheets or make opportunistic profits.  The next time the MPC sits, they may wring their hands with anguish, agonising over whether they run the risk of stoking future inflation but the harsh reality will be that they may have become mere bystanders, looking on as others take control over interest rates. 

This may be fine in the short term but those in power should worry that this state of affairs persists into a downturn, perhaps meeting out additional punishment to an economy in dire straits.  A gentle unwinding of an over borrowed populace is one thing, a recession would be quite another.  The Bank needs to take control by force, if necessary, even if that means we may face higher inflation eighteen months down the road.  The position in the UK seems to be nowhere as bad as that in the States and the Bank may find that it responds well to a few deep cuts in interest rates.  Those of us without a seat on the MPC will just have to hope that they are in touch with this new reality.