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The common answer to this question is that the base rate could be set by some free-market themed mechanism, where the price (aka base rate) depends on the balance of supply and demand for loans, instead of the current status quo of centrally-planned rates.

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But the "free market theme" is an illusion, since the interbank lending rate is a function of how much base money is available to banks, and base money is by definition the money not produced by "free markets".

The alternative of trying to fix the money supply growth and let the rate "float" doesn't look less like government intervention, and it does involve a lot more wild lurches in interest rates and bank/company failures.

When shocks his the system, the supply of loans collapses and the demand for loans increases. In good times the supply of money would far exceed the demand. Rates would go up in recessions and down in booms making the bust nearly impossible to exit and the booms into a week long party fuelled by a cocktail of heroin, cocaine and ecstasy consumed off a shovel.

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