HOWZAT

Key surveys of manufacturing and services industries, that are monitored closely by the Bank, have suggested that both sectors are contracting at the fastest pace in at least a decade.

Fears over a vicious downturn driven by a slump in consumer demand have intensified after figures revealing that household spending fell for a second quarter in a row in the three months to September, and registered its sharpest drop since the start of 1995.

Anxieties have been fuelled by sharp rises in unemployment and a wave of big jobs cuts across swaths of the economy.

At the same time, extra manoeuvring room for the Bank to cut interest rates to all-time lows was created as inflation tumbled from recent record highs. Headline inflation on the MPC’s benchmark consumer price index dropped to 4.5 per cent in October, from the previous month’s 16-year high of 5.2 per cent.

Times Archive, 1951: First rise in 11 years takes rate to 2.5%

Clearly, simply, and starkly, the Chancellor presented the most up-to-date picture of the country's economic plight

• Times Archive, 1932: Crisis pushes rates to 2%

• Times Archive, 1939: Bank rate back to pre-war 2%

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• Full statement from the Bank

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The Bank said today that even after the Chancellor's £20 billion Pre-Budget "fiscal stimulus" package of tax cuts and increased public spending, it still confronted "substantial risks" that inflation would undershoot the MPC's 2 per cent target during next year and in 2010. "The new fiscal plans are unlikely to have a significant effect on inflation beyond the [two-year forecast] horizon," it said.

Despite applause from business leaders and the financial markets, today’s watershed MPC decision will raise serious concerns.

Economists argue that unprecedented rate cuts are justified as the credit drought inflicted by banks that are hoarding cash is sapping the strength of the economy.

But there are also big worries that the banks’ unwillingness to lend will make cuts in official base rates ineffective and the MPC powerless.

There is also alarm over the toll taken by record lows in interest rates on the value of the pound and the danger that, with rates at 2 per cent, the Bank is fast running out of room for further reductions since rates cannot fall below zero.

Concern over the plunge in the pound was inflamed yesterday as sterling plummeted again, with its overall value against a basket of rival currencies plumbing a 13-year low on Wednesday, and falling still further today.

The pound is down by more than 27 per cent against the dollar over the past 12 months. Yesterday it fell by more than 2 cents from Wednesday's London close in the wake of the Bank's announcement, dropping to a low of $1.4587 by 2pm, pushing its trade-weighted index below the watershed of 80,0, to 79.9.

Economists are divided over how concerned the Bank should be over the prospect of having only very limited scope to cut rates further, but are betting on further, imminent cuts in rates that will take them to as little as 1 per cent, and perhaps to zero.

Influential experts, such as Willem Buiter, a professor at the London School of Economics and former MPC member, had urged the Bank to take aggressive measures today to prevent the recession becoming worse than those endured in the early Nineties and early Eighties.

The Times MPC, an independent panel of economic and financial experts, also recommended that the Bank cut base rates by 1 per cent today, although two of its nine members urged greater caution and called for only a quarter point reduction or no cut at all.

City analysts point out that, even if interest rates fall to zero, the Bank can resort to other, more radical measures to breathe life into the economy; for example by injecting liquidity by buying government or corporate bonds.

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