It has not been a good year for the Bank of England or its governor, Mervyn King.  Firstly, they missed their inflation target and were stung into an ill-judged rate rise and recently they have overseen in part a run on a British bank for the first time sine the 19th century.

The current credit crisis has crept up on them whilst they were looking in the other direction and the fallout threatens to undo all of the good work they have done to their reputation in the ten years since independence.  Inflation (as measured by retail prices) has been slain, or, at least, seriously wounded, but a huge surge in asset prices propelled by easy credit may take years to unwind.

Some asset and commodity price increases are rooted in shortage of supply being outstripped by genuine increases in demand but many (probably some US house prices, for example) are simply a result of access to cheap money enabling people to bid prices up and up.  Get it right, sell your property, downsize and re-enter the world of ordinary RPI much the richer, and you're laughing.  Get it wrong, be born to poor parents too late, and you may never got to enter the market, which, every year pulls further away.

Where is the Bank (or, more accurately, the rate setting Monetary Policy Committee)looking now?  Is it still smarting over earlier mistakes, a collective state of mind which makes further errors more likely, or is it trying to predict where the credit crunch could take us and, therefore, where the greater potential problems may lie?

Having felt the need to react instantaneously on missing their inflation target, it is likely that the MPC will dither over reducing rates. The world has suddenly become a good deal more complicated for central bankers and the next few months will see whether the battered Bank of England can do something to restore its credibility amongst them.