Bank makes the right rate decision

You may not have realised it but yesterday you were probably well over ?1,000 poorer by the end of the day.

That is the amount lost - on average - by every working person in the country as a result of the ?37bn that was wiped off the value of shares on the stock market. Not bad for a day's work in the City.

Of course, you won't feel any immediate effects because most of your money (if you're lucky enough to have some) will be in pension funds and other kinds of institutionalised investments which may recover over time before you cash them in.

And any tears you shed will dry before they hit the ground once you have reminded yourself that your over-valued house (again, if you are lucky enough to have one) is set for an 18% increase this year.

Yes, we are living in a topsy turvy economy and small wonder in the circumstances that the Bank of England kept interest rates on hold today.

To have increased them at a time when the global economic revival is being threatened by a prolonged stock market slump would have been reckless.

House price inflation is a very serious economic and - even more important - social problem. But it won't be solved in today's circumstances by raising interest rates.

Inflation throughout the economy (ie including house prices) is running at only 1.8%. This is well below the "target" rate of 2.5% laid down by the Treasury and provides no justification at all for raising rates now just because inflation might exceed 2.5% two years hence.

To raise rates now would be like taking the all the wheels off your car because one of the tyres had a slow puncture. There is only one way to prevent hyper-inflation in the housing markets - and that is to implement measures that will directly affect housing without clobbering other parts of the economy.

On the supply side, that means more imaginative schemes to build affordable houses for those who most need them. Incredibly, the Labour government is building fewer new homes than any other government since the 1920s.

On the demand side, it will require some kind of tax on house sales applied in a revenue neutral way (ie the proceeds could be redistributed elsewhere in the economy) or the introduction of capital gains tax.

Meanwhile, nothing should distract attention from the need to prevent the collapse of stock markets from undermining consumer confidence, particularly in the US.

Share prices are now back to the level they were five years ago. The trouble is that some of us thought they were overvalued then - even though we were unaware of the scale of the accounting frauds going on.

The worst scenario we now face is that the collapse of confidence in US stock markets might lead to a mass withdrawal of the overseas (particularly European) funds that have been keeping the dollar and Wall Street at such inflated levels during the boom years.

It is mainly high share prices (with the accompanying feelgood factor) that have been inflating consumer spending in the US. This is one of the factors keeping demand relatively high in the rest of the world because of the US's ravenous appetite for imports.

If the US economy goes into a tailspin we will all be dragged down with it - unless we take countervailing action to boost demand in Europe and elsewhere.

The US has been rightly criticised for not taking its proper place in the governance of the globe at the political and social levels. But in economic terms it has been carrying the rest of the world for years. Now Nemesis is approaching.