My monetary policy models indicate the MPC should have cut rates yesterday while the ECB should have signalled an easing bias. The intransigence of the two central banks despite mounting economic risks from credit market deterioration and a sinking dollar threatens to push markets to a “riot point”.

As others have noted, there are similarities with events preceding the October 1987 stock market crash, when the Bundesbank defied an international effort to support the dollar by raising interest rates in response to an oil-induced rise in inflation. While the ECB and MPC were on hold yesterday, interbank rates have been climbing.

Stock markets have been sliding rather than plunging but credit markets have already crashed. On one measure of the yield spread of sterling corporate bonds over gilts, the rise over the last six weeks represents a four-standard-deviation event.

I still think a hard economic landing is avoidable and plentiful liquidity will limit stock market damage but central banks are increasing the risks. The Fed is as much to blame, with its panic cuts serving mainly to undermine the dollar and inflate a commodity bubble. There is a strong case for coordinated policy action, with the Fed holding US rates at current levels and the ECB and other major central banks easing. Markets may force such action if it does not occur voluntarily.