The Bank of England’s bold move today to order a drastic 1.5 percentage point cut in interest rates is being greeted in the City with the appropriate mixture of shock and awe.

The decision to slash base rates aggressively takes them to their lowest level since 1954, at just 3 per cent.

The fact that the official cost of borrowing is now at the same level as that austere era in Britain’s post-war history is an appropriate reflection of the scale of the recessionary danger now facing the economy.

So the Bank should be applauded for taking just the sort of decisive and determined action that Mervyn King, its Governor, had made clear is needed to confront the extraordinary peril to both domestic and global prospects.

The scale of the Bank’s move reflects two crucial factors.

First, since official confirmation that the economy shrank in the third quarter by a sharper than expected 0.5 per cent, it has become increasingly clear that the economy is likely to contract still faster in the present quarter.

A deluge of grim figures from key sectors have underlined the looming threat of a deep and protracted recession.

Secondly, the depth of the downturn now taking hold has effectively removed the concerns about inflation that had previously dogged decision-making by the Bank’s Monetary Policy Committee.

With the economy slowing this rapidly and facing a brutal squeeze on credit supply from the banks, inflation — as the Bank’s statement today makes plain — is set to drop back very sharply into next year and is, for now at least, yesterday’s problem.

So the Bank’s old dilemma over conflicting pressures from rapidly slowing growth and rising inflationary pressure has vanished. This is only emphasised by the fact that future expectations of inflation among households — a key worry for an MPC determined to prevent wage and price pressures becoming entrenched — have plummeted.

In turn, then, all of this opened the way for today’s action to try to halt the vicious downward spiral created by the credit crunch and worsened by the housing slump.

There are two big questions, however, that are posed by today’s welcome verdict from Threadneedle Street: is it too late, and will it work?

The size of this interest rate cut inevitably raises the question of whether the Bank should have acted earlier to get rates down in recognition of the rising risks to the economic outlook.

Arguably it ought to have done. Yet the MPC could legitimately counter that its mandate is to meet the inflation target, and that still rising inflation that had reached 16 year highs made it reasonable for it to insist on being certain that this threat was being addressed before easing rates.

The second question is the more vital. A rate cut on this scale was undoubtedly necessary, but it may be far from sufficient to forestall a nasty recession, or set the stage for recovery.

Rates will have to fall still further to limit the extent of the downturn on which the economy is embarked.

Indeed, with banks reluctant to lend, and still likely to charge far more than base rates for the lending they are prepared to do, while both consumers and businesses will remain reluctant to borrow against a backdrop of recession, the overall effectiveness of any rate cut, however large, has to be questioned.

Still, the good news is that the Bank of England has made clear today that it is at least prepared to do all that it can, within its powers, to prevent a deep economic slump. That, at least, is a cause for some relief, if not cheer.

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