An independent Bank of England and the economic stability it brought are often hailed as Labour's greatest achievement. Yet the bank rate in Britain, now at 5.75 per cent, with another quarter-point rise in the pipeline, is the highest among the Group of Seven richest industrial nations. Two million Britons, protected from market forces by fixed-rate mortgages, face a shock when the deals come to an end and they are forced to face some of the highest borrowing costs in the western world.
The creation of the Monetary Policy Committee (MPC), a few days after Labour won office in 1997, was seen as an act of genius, removing interest rates from the realm of politics and ending the decades of stop-go that destroyed governments from Wilson to Major. Gordon Brown had the vision to dust off a plan for the Bank of England that lay dormant in the Treasury files. This action had been rejected by his Tory predecessors Nigel Lawson and Kenneth Clarke, who were too scared to cede control over interest rates - which, along with fiscal policy, is one of the two great levers of economic power.
Yet if the independent Bank has been so successful, why have rates nearly doubled from the low point of 3.5 per cent reached four years ago? Why are inflation and interest rates lower in the much-denigrated eurozone, at 4 per cent, and in the US? Although the MPC system may be better than the random approach that it displaced, it is still badly flawed. The process of choosing members, their terms in office and the precise role of the governor of the Bank, Mervyn King, must be re-examined. But that is not all. The Bank's pursuit of a single inflation target, measured by the Consumer Prices Index, which excludes housing costs - the biggest component of household spending - is bonkers. It needs to be replaced, as does the opaque way in which the MPC talks to markets and the public about its thinking.
The present nine-member panel does not represent the best and the brightest of economics; nor are traditional central banking skills in the ascendancy. The two deputy governors, Sir John Gieve and Rachel Lomax, are Whitehall cast-offs. One external member, David Blanchflower, lives and teaches in the US. Yet, judging by his intermittent visits to the UK, he exercises an influence over the prosperity of every consumer and business in the country. The former CBI economist Kate Barker was reappointed to the panel on the basis that she has done good work for Brown on planning reform. Another, Timothy Besley, was brought in hurriedly last year when a vacancy opened up because he happens to have been once a tutor to Ed Balls.
Paradoxically, some of the nation's most respected voices, such as DeAnne Julius and Sushil Wadhwani, served only one three-year term because they developed worrying streaks of independence.
The voting model used by the MPC, described as "one person, one vote" - in other words, every person for him or herself - has resulted in some bizarre outcomes. In June, Governor King was outvoted by his cohorts 5-4 when he wanted an immediate increase, a decision that undermined his authority. When the same thing happened at the US Federal Reserve during the reign of the great Alan Greenspan, the Open Market Committee, which sets rates, was reconvened within hours to reverse the decision and make sure the chairman was not damaged.
The big difference between the Fed, the European Central Bank and the MPC is that the first two institutions are dominated by experienced central bankers. All those voting on the ECB are central bankers in their own country who are steeped in the history of inflation and monetary doctrine, and they have been remarkably sure-footed in setting a one-size-fits-all interest rate for euroland.
Rather than aiming at a single inflation target, the ECB and the Fed look at a variety of measures including the money supply. Had the Bank of England been monitoring credit and monetary trends much earlier, interest rates would not have fallen so far as they did and the current housing and consumer debt time bomb would not have been triggered.
So desperate are consumers for cash to meet interest payments and to keep spending, that savings of households in Britain were run down to the lowest level in history in the first quarter of this year. Under pressure from King and the Treasury select committee, Brown has conceded one small change: seats on the MPC will be advertised openly rather than filled haphazardly.
The new Chancellor, Alistair Darling, has the chance to set in motion bold reforms, including longer terms for MPC members, modernisation of targets and clearer communication. But don't count on it. Brown has deluded himself into thinking that his Bank of England model is perfection.
Alex Brummer is City editor of the Daily Mail