Hopes of further aggressive interest rate cuts were boosted yesterday as it emerged that the Bank of England considered a drastic reduction in borrowing costs of two percentage points, or even more, this month.

Expectations of another sharp cut in base rates before Christmas mounted after minutes of the Bank’s nine-member Monetary Policy Committee (MPC) revealed that it unanimously backed the radical 1.5point cut made a fortnight ago.

But predictions that rates could tumble to historic lows of 2 per cent or less in the new year gathered pace as the record of the MPC’s debate showed that it already believed that an even larger cut this month was warranted.

The message from the minutes reinforced last week’s strong signals from the Bank that it is ready to take unprecedented steps to prevent the recession mutating into a brutal slump.

The Bank’s latest, bleak forecasts for the economy implied that a very significant reduction in rates, possibly in excess of two full percentage points, might be needed, the minutes said.

The MPC felt that the case for drastic action was reinforced by the dampening effect on the impact of rate cuts due to banks curbing access to credit for business and household borrowers.

Amid growing worries over a rapid decline in the pound, anxieties that a still sharper cut in rates than this month’s 1.5point reduction might trigger a dangerous collapse in sterling, in turn stoking inflation, emerged as a key reason why the MPC decided against a bigger move.

“A key concern was the degree of surprise to financial markets. Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive,” the minutes said.

Other factors that persuaded the MPC not to opt for an even larger cut were that it wanted to wait to see the size of tax cuts and spending increases by the Chancellor in next week’s PreBudget Report, and that it wanted to gauge the effectiveness of the Treasury bailout of the banks. Some MPC members argued that the Bank should keep its powder dry and leave room for more cuts to come “to support confidence as the economy weakened”, the minutes said.

Pressure for a further, sharp cut in rates next month was stoked yesterday as the CBI reported that manufacturing orders fell for a fifth month in a row this month, while confidence in industry remains mired at its lowest in almost 30 years, since the depths of the Eighties recession.

The bleak picture of worsening conditions was reinforced by the latest surveys by the Bank’s regional agents, which showed activity slumping across swaths of the economy.

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