Mervyn King, the Bank of England’s Governor, likes to describe its task these days as a “difficult balancing act”. It is certainly that.

For months the Bank and the nine members of its Monetary Policy Committee charged with setting interest rates have been forced to juggle pressures from two opposing but equally serious threats to the economy. On the one hand, surging household bills have combined with weak growth in incomes and rising taxes to inflict a vicious squeeze on living standards and spending power. In turn, that has threatened to put the brakes on the consumer spending that accounts for 60 per cent of the economy.

The scale of the squeeze is emphasised by new figures from Pricewaterhouse Coopers, the accountant, which show that, if housing costs and utility bills are excluded, households’ real disposable income did not grow at all last year. The danger that this squeeze will trigger the sharp slowdown in the economy now widely feared appears to argue for lower interest rates.

Yet on the other hand, surging price pressures have threatened the Bank’s mission to keep inflation in check, and in line with its 2 per cent target set by the Chancellor.

The fear for the Bank is that as inflation has been driven upwards by dearer food and fuel, workers will start to demand higher wages, and companies facing higher costs will attempt to push through further price rises, triggering a “wage-price spiral” and entrenching inflation into the system.

In recent days, however, Mr King’s “difficult balancing act” has been transformed into an even more dangerous high-wire act as all of the pressures facing the committee have intensified.

The squeeze on households has grown even tighter and inflation anxieties have also worsened as a steep slide in the pound has sent Britain’s import bills climbing.

The decision to cut rates today shows that the committee is now convinced that the significant slowdown in the economy will ultimately quell inflation. The Bank now wants to avoid the slowdown it believes was necessary to put a lid on price pressures turning into a much more severe downturn that could ultimately lead to recession.

The tightrope that Mr King is being forced to walk is likely to mean that further interest rate cuts will wait for a month or two. But the growing dangers mean that, eventually, borrowing costs should have much farther to fall.

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