The news that Britain is now officially in recession raises two immediate questions. First, why has the economy here fallen so much harder and faster than in America, which was where the trouble supposedly began? Third-quarter figures for the US economy are also expected to show a contraction, but this is likely to be smaller than Britain’s 0.5 per cent decline – and will follow a fairly strong second-quarter growth in the first half of the year. By contrast, the British economy has been stagnating or contracting since April.

So why has Britain led America into recession, instead of following it? Part of the explanation is that our economy is more dependent on financial services and experiences a much bigger house price and mortgage boom. Another part of the answer is that policymakers in America reacted much more quickly to the economic risks – slashing interest rates from 5.25 per cent to 2 per cent by April and implementing a big tax cut in May.

It was only in September, when the US Treasury undid all this good work with its astonishing decision to put Lehman Brothers into bankruptcy, that a recession became inevitable in the US. In Britain, by contrast, the Bank of England was slow to respond to the danger of recession, keeping interest rates at 5 per cent – the highest level among the G7 countries – until two weeks ago.

This leads to the second and more important question: what can be done to minimise the damage of this recession, now that it has begun? The answer is simple. The Bank must reduce interest rates at least as energetically as the US Federal Reserve did last year. In the past two recessions – 1979-82 and 1990-92 – interest rates were cut by about ten percentage points from peak to trough, before economic growth was restored.

Looking farther back, to the recessions of the 1960s and 1970s, interest rates reductions were never less than three percentage points. The present base rate of 4.5 per cent is 1.25 percentage points below its peak rate of 5.75 per cent last December. So the Bank of England is not even halfway through what ought to be seen as an absolutely minimal monetary response.

In reality, the Bank can and should be much bolder than in previous recessions because of the unprecedented credit contraction, which Charles Bean, the Bank’s deputy governor, described as “possibly the largest crisis of its kind in human history”. As a result of this crisis, the interest rates actually paid by most businesses and homeowners have risen, even as the Bank has cut its base rates. To cut the interest rates paid in the economy by the minimal three percentage points that was needed to ease previous recessions, the Bank should therefore reduce its base rate to well below 2 per cent.

The Bank can be much bolder than in past recessions because, for the first time in history, British monetary policy is not constrained by a need to “defend” the pound against some arbitrary external standard – either the German mark as in the 1990s recession, or the dollar, as in the 1980s, 1970s and 1960s, or the gold standard in the recessions of the prewar period.

Dramatic monetary action – which ought to begin with a full-point rate cut at the Monetary Policy Committee’s next meeting on November 6 and should logically continue until Britain has the lowest interest rates in the world outside Japan – would have the useful side-effect of making the pound ever more competitive, thereby helping the export industries, whose revival could partly offset the problems of finance and housing.

Already the pound has fallen almost as much against the dollar as it did in the months after Black Wednesday in 1992 – and further declines may well lie ahead if the Bank of England cuts interest rates more aggressively than the European Central Bank. Britain, in other words, should now benefit more than ever from its decision to keep its currency independent outside the eurozone.

If the Bank of England is now prepared to take full advantage of currency flexibility and monetary independence, the recession, which began last summer, could still prove to be fairly brief and shallow. If, on the other hand, the Bank refuses to use monetary policy in a timely and energetic manner – and instead imitates the foot-dragging practices of the European Central Bank – then it will be time to question the benefits of central bank independence, and even of Britain’s decision to stay outside the eurozone.

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