The Bank of England’s desperate bid for relevance

The decision by the Bank of England's Monetary Policy Committee to cut interest rates by a whopping 1.5 per cent has come as a real shock, not least, one suspects, to its own members. These are the people, after all, who were supposed to make monetary policy boring. Ever since the MPC was set up by Tony Blair's government in 1997 its natural inclination has been to move rates, up or down, by a quarter of a per cent per month, if at all. What can have possessed it to do six months' work in a morning?

The obvious answer is that an increasingly alarmed country was looking for a bold move, and the Bank is right to have made one. But the Old Lady may also have been worrying about her own job, just as much as ours. Ever since the credit crunch first struck, the

Bank has been losing control over interest rates. When it cut the base rate by half-a-per cent last month, many lenders paid no attention at all. Some even raised their rates, leading observers to question the point of the MPC if it could be so easily ignored.

The Bank was also under pressure because, back in the summer, it badly misread inflation. When oil and commodity prices spiked upwards, it feared that a Seventies style wage-price spiral was about to develop. With the economy already declining sharply that was never likely to happen. But the Bank's refusal to cut rates then has led directly to its having to cut them so dramatically today.

The Bank must be hoping against hope that, having finally acted decisively, the markets will take it seriously and pass its big cut on. Based on recent experience, many borrowers will be lucky if they benefit by more than half-a-per cent. Whether this will be enough to save the Bank's bacon, or anybody else's, only time will tell.