The myth that the Bank of England sets interest rates has been exposed. The market sets the price of money just as it sets all other prices and, at present, the market says the price is high.

All the Bank has done for the past decade at its monthly interest rate meetings is to spot the way the wind is blowing and to move its rates to match.

Finally idealism and reality have parted however. Thinking that it could cut bank rate at the September meeting – or in the near future – to save the financial system is nonsense: out in the real world rates are rising, whether on credit cards, mortgages, overdrafts or the rates paid to savers and institutions to persuade them to deposit cash. The rates banks pay has had to rise: even banks are now reluctant to lend to each other without receiving a hefty premium.

Suddenly the world has woken up to the risk involved in lending and wants rates that compensate for the danger of the loan not being repaid. It will be a shock for a lot of businesses to find they are no longer regarded as prime and have to pay that risk premium.

It may make companies reshape their finances to appear a safer prospect but until they do, they should not be surprised to find that when their loan or overdraft comes up for renewal they have to pay 3 per centage points above bank rate compared with the current 2 points. That is a 100 basis point increase, and even if the Bank of England announced a quarter-point cut in bank rate, it would still be a 75 basis point rise.

It really doesn’t matter what the Old Lady does with bank rate if the market has already put up the rates that companies and customers pay. As Mrs Thatcher said, you can’t buck the markets.

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