The Bank of England may have given homeowners a boost yesterday by holding interest rates, but it's not necessarily all good news, argues Andrew Lydon.

Even with interest rates held yesterday at 5.25 per cent, few pensioners will be getting as much as five per cent in interest on their savings, without tying them up in bonds based on the stock market.

Investments can go down as well as up, as has been again demonstrated over the past few days. And few will really have made a consistent five per cent a year over the last decade. However, we know that the Government admits inflation for pensioners has been six per cent, and many would put it even higher.

This means the buying power of pensioners' savings is being eroded in their banks. Interest rates are negative for pensioners in this country, even with the recent interest rate increases. They are only positive for anyone else, if one believes that inflation for those others is only what the official inflation figures say it is.

In recent years these inflation figures have lost much of what credibility they had. Few people who have used the Office of National Statistics' on-line personal inflation calculator have not come away finding their inflation is higher than the Government’s ‘national’ ‘average’.

With savings being eroded, it is hardly surprising we have become a nation of borrowers and are no longer saving. Increasing numbers of people have tried to safeguard their retirement prospects by speculating in property and ‘buy to let’.

This has fed the UK’s unique house price inflation, that has eroded the living standards of the younger generation, such that it now takes two incomes to run a household that would be run on one income a generation ago.

The type of economics that was taught that generation ago, would have recognised that what is being described here is protracted defeat in the war with inflation.

Instead we have today a London financial establishment that congratulates itself on its robust ‘independent’ governance of inflation plus the financial innovation of the ‘City’.

However, much of the rest of the world have systems that do not under-register inflation, and thus their financial systems deliver real interest payments to savers, and thus don’t drive them into the hands of stock markets and property speculation.

Our financial establishment have a vested interest in the official under-registration of inflation, as their returns to savers would stand shrivelled-looking if exposed to true inflation deducted comparison.

It is not the much-vaunted City analysts that have ever held up our flawed inflation figures to scrutiny. It has been consumer interests and the press. Those that Gordon Brown has appointed to safeguard us against inflation, the Monetary Policy Committee (MPC) of the Bank of England, have done least to foster attention on these problems.

The USA has a far better system for recording inflation than we have. It properly includes rising house-prices. It runs indices for most of the big cities plus its big census regions, so that inflation ‘hot spots’ can be quickly detected. So hot spots hardly occur over there, whereas over here hot spots are becoming contagious and their spreading is part of our national life. Yet, at least two Americans have been among those appointed to the MPC since 1997.

If the Bank of England insisted on rates that were proper real interest payments for savers, this could put many banks under pressure. Some might even need bailing out.

This would fall to the very same central bank, which still has the role of ‘lender of last resort’. Proper reform of the Bank would need to split these roles. Further, there should now be representatives of provincial England involved in running the Bank's monetary policy. They could be nominated by the institutions of regional governance that are emerging across the UK.

Former members of the MPC have themselves recently raised questions about the secretive way Gordon Brown appointed them. Besides his American friends, he even originally appointed a Dutch professor.

It is provincial England that would have to look hard for friends on the MPC. Midlands manufacturing has on occasion claimed that they were paying the price of a monetary policy skewed to restrain southern property booms. But it is hard to see how the current counter-inflation infrastructure really benefits anyone but the banks and the City.

We have set out a range of possible new inflation indices in our LWM Regional Prosperity & Inflation Framework. These would borrow from best practice in Europe and America. They would give separate inflation figures for England – north, south and central – and within those ‘regions’, separately address the expenses of pensioner and family households as well as key workers.

While we are actively lobbying for government to adopt such a framework, one could only really have faith that it would be properly pursued if we put in place a central bank that had clear representation from provincial England.

The US and the German central banks have long had such regional foundations, and have set the standards for counter-inflation in recent decades. Perhaps we now need a new Bank of Britain.

Under such a Bank, we could have a new approach to tackling our endemic inflation. House-price inflation should be seriously addressed. But not how the current Bank of England is suggesting. Kate Barker, the longest standing member of the MPC, has been championing a crash house-building program across southern England, and advocates a bulldozing of all planning authorities that stand in its way. This would not be how a broader based central bank would address an inflation that has been powered by speculation.

There is no shortage of homes standing empty in this country – whether through either being held as ‘assets’ or amateur landlording.

The Regional Assembly have published studies showing that even in 2001, 20 per cent of new flats in central Birmingham were being held vacant.

One hears of even higher figures now. Would this really be happening if we did not have negative real interest rates? As interest rates now head upwards from the unsustainable levels of the last decade, some will feel the strain. But saving will make sense again for millions.

The financial institutions have fed our unique English house-price inflation. House prices could not have risen so far, had there not been a herd of lenders willing to lend ever increasing sums to desperate borrowers.

As these lenders could repossess if it went wrong for the borrower, the lenders lost least. The sort of people who dominate financial policy in this country would never question whether a lender who has made the more reckless loans should have the same automatic right to repossession as more cautious lenders.

• Andrew Lydon runs the Regional Prosperity project for Localise West Midlands – work which was originally funded by the Joseph Rowntree Reform Trust, and built on earlier work by WM new economics