The Monetary Policy Committee have a clear brief from the government to keep control of inflation, and arguably this has been achieved in recent years, but in times such as we have now it seems interest rates have a negligible effect on inflation and instead the MPC looks as it if is re-arranging the deck chairs on the Titanic as the economy goes belly up and the housing market collapses.
You could really argue that inflation has not really been controlled by the MPC at all in recent years. There are many who would argue that inflation has only really been kept under control because of the likes of Tesco and China. Governments are not interested in curbing the power of the supermarket giants by stopping them squeezing the profit margins out of suppliers and farmers, after all, this reduces costs and keeps inflation low.
Likewise, China's massive increase in production meaning their cheap labour force produces DVD players and clothes for next to nothing has similarly meant that the MPC has taken the credit for steering a ship that was already heading in the right direction.
But with the current crisis in the markets, the Bank of England and the MPC's remit looks hopelessly out of sync with what is needed right now.
Everyone knows that interests rates have got to fall much further than they have at present but the MPC keeps then at double the US interest rate levels because "inflation is too high", but in doing so they fail to actually examine why inflation is so high.
The fact is that the luxuries that people spend money on because they have free cash are actually still falling in price. Wide screen TV's, Blu-Ray players, Nintendo Wii's and IPods are not rising in price. No, what is pushing prices up are those essentials that people have no choice over paying for. Grain prices are st to double, the price of beef is up 10% this week whilst petrol and other fuels continue their inexorable rise. People have no choice about whether to heat their houses or eat food, so this inflation will continue unabated whether interest rates are high or not yet the MPC seems completely oblivious to this fact.
The problem is that lots of people are now finding their fixed rate mortgage deals are coming to an end and as a result of the market difficulties, are now finding it much more difficult to find deals which match those deals that are coming to an end. This means that people are now much poorer, they have less money and in some cases they may not be able to afford to pay their mortgages. This means more repossessions and falls in house price which in turn means negative equity and a real crisis in the real economy. But none of this will alter inflation what so ever because inflation is high only because essentials are going up.
The fact is the MPC needs to have its government remit widened, its needs to know that it's raison d'etre is not just to ensure low inflation but to ensure that it considers the money markets and growth too, and for that to happen the government needs to understand the true depth of the problems in the economy. That, however, looks unlikely given their consistently bullish statement about the current problems.
In the long term the only way for to ensure that the MPC has it's remit widened will be if there is a change of government which with each new month looks ever more likely.
Gordon Brown's first act on becoming Chancellor was Bank of England independence. Ironically it might be his inability to see the limitations of what he did in 1997 which will be his undoing.