James Moore: Even the bookies can't decide on interest rates

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Speculating on UK interest rates is usually a pointless exercise because when things are stable, the decisions of the Bank of England can be predicted with near certainty. Helpfully, members of its Monetary Policy Committee have a habit of ramming the point home in speeches in the days leading up to their monthly meetings, just in case anyone harbours doubts. Not so this time. Spread-betting company Cantor Index effectively rates the chances of a cut at more or less evens.

And the case for a second consecutive rate reduction is easy to make. The credit crunch is like one of those nasty winter colds that refuses to go away. Libor the rate at which banks lend to each other remains stubbornly high.

Homeowners who borrowed big at favourable rates to buy into the dream of home ownership a few years ago are going to have nightmares when they try to refinance this year. The very real prospect of a sharp increase in repossessions bodes ill not only for the increasingly torpid housing market, but for the wider economy too.

Then there is the oil price. As we report on page 3, economists are beginning to fear that the current speculative bubble could kick the economy when it's down if interest rates do not fall fast enough. Add to this nasty little concoction the news on the US economy last week, which was poor and culminated with the rotten news on the unemployment rate on Friday.

But before anyone decides to join those seeking to make a few quid by betting on a rate cut, they should set these arguments against the MPC's innate conservatism. A cursory glance at the leaden-footed manner in which the Bank reacted to the credit crunch and the Northern Rock debacle tells its own story. Changes in rates are rare in months without an inflation report and this is January, with economic data thin on the ground coupled with signs that Christmas retail sales were not as bad as some had feared.

The Bank's reputation has taken a fearful beating in recent months. Keeping UK plc clear of a hard landing would do much to restore it and cutting rates on Thursday would be a big step in the right direction. But I wouldn't bank on it happening.

Cheap-credit hangover

Talking of those homeowners, it's hard to see their sober-suited bankers as drug pushers. But drugs, in the form of cheap credit, are just what those bankers have been selling potentially highly addictive, dangerous and with the capacity to inflict the mother of all hangovers on those who overdose.

Large numbers of people are now staring those hangovers in the face. They will find it impossible to get anything like the sort of rates they were offered when they took out their loans, and thousands of them will face serious financial difficulties as a result. So moves, under the auspices of the British Bankers' Association, to address the problem are timely.

Banks bear a heavy responsibility for the current situation. It was only last year that some, notably Abbey, were advancing mortgages to selected customers on multiples of up to five times' income. Dealing with such debt would be a stretch for almost anyone bar City traders or hedge fund managers, even in relatively benign conditions. The current outlook is anything but.

Ultimately, lending like this is commercially stupid. But then so in all but the most extreme cases is repossessing homes. Taking steps like restructuring loans, and accepting lesser repayments over longer periods, is not only in the interests of the consumers, it is in the banks' long- term commercial interests as well. There is nothing like a wave of cheap repo properties to send the housing market into a tailspin, and the economy with it. Lenders have made some silly mistakes over the past few years. The BBA's intervention is sensible because it is not yet too late for the mistakes to be corrected.

Bank shake-up

The problem with regulating banks in Britain is that there are three bodies which fail to communicate and do everything they possibly can to pass the buck when the going gets tough. The Northern Rock debacle highlighted the weaknesses inherent in the system.

Plans for a shake-up, announced on Friday by Alistair Darling, have much to recommend them. Allowing the Financial Services Authority to seize deposits at failing banks in a manner similar to that employed by America's Federal Deposit Insurance Corporation make sense and would provide security for consumers, preventing Northern Rock-style runs. But questions have to be asked about how a Cabinet committee involving the FSA, Bank of England and Treasury would solve the communication problems writ large by the Rock debacle. And identifying who exactly would be in charge next time remains murky to say the least. These are questions Mr Darling needs to answer if he wants to be remembered as a successful Chancellor, not a bumbling Captain Darling, the whipping boy of the brooding Captain Blackadder next door.