The Bank of England has done its bit. Now it is the Government’s turn.

The scale of yesterday’s interest rate cut will have surprised even those ministers who were putting unprecedented pressure on the supposedly independent Bank. But given the dire state of the economy and the pernicious nature of the credit crunch, there are serious doubts about the effectiveness of the cut. It is clearly necessary but unlikely to be sufficient to forestall a nasty recession.

Along with the 1.5 percentage point cut, the Bank clearly signalled that it was prepared to do all that it can to prevent a deep slump. That may require further cuts, possibly taking rates to as low as the 1 per cent now ruling in America. But ultra-low rates are not always enough to avoid a long period of stagnation as the experience of Japan demonstrates.

One of the weaknesses of monetary policy is that there is a lag between changes in interest rates and the effect on the economy. The rule of thumb is that the cuts in rates take a year to work through fully into growth.

In the present climate, the lag may be longer still. In particular, it is very hard to estimate how quickly the cut in base rates will feed through into lower payments on variable rate mortgages.

Lenders are under intense pressure to pass through the cut in full as soon as possible. However, as the Council of Mortgage Lenders pointed out again yesterday, the key is how the rate cut feeds through into lenders’ own costs.

Wholesale borrowing rates have been falling at last and yesterday’s cut was certainly not “in the price”, so further falls should be expected. But the money markets remain extremely thin. Meanwhile, the competition for retail deposits remains fierce, which will limit lenders’ scope to cut savings rates.

It is even less clear how quickly the cut will be reflected in new borrowings, though some lenders have said they will pass it on in full.

Mortgage finance will still be hard to get, particularly for those without large deposits. The cut will also take time to feed through into business lending. Banks will inevitably be cautious, with the risk of bad debts rising as the economy contracts. Other things being equal, the rate cut should weaken sterling and so help exporters. But the pound actually rose against the dollar yesterday.

All of this points to the need for the Government to come up with a US-style fiscal stimulus. Increased government spending would help but again there is a lag, so the emphasis should be on tax cuts.

The public finances are in a shocking state already. But, as the American people showed on Tuesday and the Bank showed yesterday, now is the time to be bold.

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