The Bank of England could slash interest rates by half today, taking them to their lowest level since . . . well, ever, really. Unfortunately, the impact on the economy is likely to be of rather less historic proportions.

Cutting rates to 1.5 per cent or even 1 per cent would put a bit more money in the pockets of nearly four million mortgage borrowers who have base rate tracker loans. But savers will lose roughly the same amount.

The move would have less influence on the rate that banks charge business borrowers and next to no effect on the availability of loans to anyone.

The recent cuts in official rates have had little impact on the flow of credit, with the Bank of England’s own credit conditions survey showing that the squeeze is likely to get worse.

Despite the huge dollops of taxpayers’ money pumped into the banking system, the banks are not meeting the demand for credit, partly because they are worried about their mounting bad loans.

The fact that Barclays is planning job cuts in the unit that lends to small and medium-sized businesses is hardly encouraging. “We would love to give you a loan, sir, but there is only Mr Simkins left here and he has 25,000 other applications to process.”

In normal circumstances, interest rates are a powerful lever for regulating economic activity. The credit crunch has turned that lever into a soggy piece of string.

The US authorities started pulling the string earlier and more vigorously than the Bank. And just look at the results. The US economy has continued to spiral downwards

One employment survey released yesterday suggested that 700,000 US jobs were lost in December and some analysts speculate that the figure could be nearer one million.

Back in Britain, the one effect that a big rate cut today could have would be to put further downward pressure on sterling.

The big fall in sterling in recent months should give a significant boost to the economy. Some observers suggest that because overseas markets are weak the reduction in sterling will have little impact on exports. This is surely nonsense. It is like telling Marks & Spencer that there is no point cutting prices when consumer spending is down.

Some members of The Times Monetary Policy Committee believe that the Bank should be wary of undermining the currency further with more steep rate cuts. Others think that sterling has stabilised in the past month and this should no longer be seen as a constraint. But pretty much all are agreed that base rates are now a sideshow.

What is needed is for the Government and the Bank to intervene more directly to get credit flowing. This could involve government guarantees for bank borrowing and lending or, indeed, direct lending by the Government. The authorities are also considering various forms of “quantitative easing”, creating money to buy financial assets and drive down market interest rates.

Alistair Darling has made clear that the Treasury will be closely involved in such a strategy rather than leaving it to the Bank. This has raised concerns about the Bank’s independence. But, given the billions of pounds of taxpayers’ money that will be at stake, it seems only right that the Chancellor should be in on the action — which should start soon.

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