Hamish McRae: Money is still cheap, but that is afat lot of use if it is not available

I worry we are focusing on the wrong things. The best example of this is the huge preoccupation with official interest rates, such as the Fed's decision yesterday or the European Central Bank's next month, or indeed the actions of the Bank of England Monetary Committee. But there are other examples, including official inflation rates that bear little relationship to the rates of inflation that people feel in their day-to-day lives.

The interest rate mismatch is serious because it seems that policy is increasingly irrelevant. I saw an advert in the tube this week from Halifax that proclaimed in huge letters "10 per cent" – that was not what it was charging for a loan but what it was apparently prepared to pay for deposits. The small print was too small to read and a friend who popped into a branch for a brochure explaining what was really on offer was told they had run out, but helpfully was told that "we have these other products you might be interested in". So it may be there are special requirements that make the offer less attractive than it seems at first glance. But the fact remains that if the Halifax is having to pay 10 per cent for retail deposits it cannot be making much money on mortgages at, say, 1 per cent over base rate.

Official base rates are 5 per cent. In normal times, at that base rate, money market rates would be between 5.1 per cent and 5.2 per cent. But they are not: the rates vary a bit with the maturity but in general they are more like 5.8 per cent. So we have the equivalent of base rates of 5.5 or even 5.75 per cent.

It gets worse. Those are the posted rates but banks can only borrow small amounts at those rates, at least by past standards. Deposits that have in the past been rolled over automatically when they mature are not necessarily rolled over now. To keep themselves funded the banks therefore have to pay over the odds for large commercial deposits – or offer 10 per cent to retail customers. We pay attention to minutiae such as the voting pattern on the monetary committee but fail to chronicle the funding pressure on the banks.

We can see some of the consequences, though. If banks cannot reliably fund themselves they have to allocate the funds they have to servicing existing clients rather than going out to seek new ones. At a retail level this means that people whose fixed-term mortgages are running out find it hard to take their business elsewhere. Some just have to keep their mortgage where it is and pay the higher rate. At a commercial level borrowers are stuck too. If they have credit lines on favourable terms they have been tending to use them, borrowing as much as they are allowed even if they don't need the cash just to establish that the lines remain open.

It is hard to get a fix on all this because there is no published index of "difficulty of getting a loan" that you could say has doubled in the past year. We do know that in the UK the number of new mortgages has slumped and housing transactions have halved but we don't know what is going on in, say, American medium-sized businesses. But there is still plenty of money around in some places; I fear that we are moving into a period where the cost of money will become less important than its availability.

Already the cost of money in the developed world is below its long-term average in real terms. But cheaper money is not the same as easier money. In the US, official rates at 2 per cent are way below inflation so money in theory is cheap. But that is a fat lot of use if it is not available. The danger is that the world will slither into the situation that Japan found itself in during most of the 1990s, when official interest rates were at or near zero but the banks were too frightened to lend any money. Their books were so full of bad debts that they could not make new ones. In Japan the problem was compounded by falling prices, something that we don't have now, except in the property market. But I wonder whether the traditional relationship between the US labour market and Fed policy is relevant any more. If, just for the sake of argument, the Fed were to try to offset a rise in unemployment by cutting rates to 1 per cent, would that have any effect? I am not certain it would: if 2 per cent is not low enough to prevent recession, why should 1 per cent be any different?

In any case the ability of central banks to cut interest rates is inhibited by the surge in inflation. The spike is quite sharp. Indeed there is a possibility, assuming base rates stay at 5 per cent, that we will have negative real interest rates in Eurozone, France and the UK (the RPI measure). Or rather we would, were the money around, which as argued above, it isn't.

That obviously presents a dilemma to the policy-makers: to what extent should they pay attention to the real cost of money and to what extent should they still focus on their own interest rates? I don't pretend to know the answer to that but I am pretty sure that central banks should pay attention to changes in asset prices as well as current inflation. They should have leant harder against the global housing boom, even though current inflation at the time seemed under control. I don't think anyone doubts that now. And in the coming months, if the housing markets around the world really crash, then it is surely also the job of central banks to make sure that the falls are not on a scale to destabilise national and international banking systems.

There has to be a balance. You cannot have central banks targeting house or indeed any other asset prices. That would be ridiculous. On the other hand you cannot have them ignoring them altogether. There is a view that the job of central banks should merely be to pick up the pieces afterwards. But while some picking up will always have to happen after asset bubbles, that seems a little unambitious.

In any case there is probably more picking-up to be done. First round effects of the credit crunch may have come through but the money markets are taking far longer to get back to some semblance of normal than anyone thought possible last autumn. The longer they are gummed up the greater the danger of damage to the real economy, or more specifically, the harder it will be for the real economy to sustain a lasting recovery when, in 2010 or whenever, things start to climb again.

The key point is that lower official interest rates are not of themselves the solution to the credit crunch. The availability of money is more important than the price.