The Bank of England rather missed the point yesterday. Not because it cut base rates to 1.5 per cent, instead of the 1 per cent many pundits had expected, but because lowering interest rates will do little to revive the flagging economy.

Rates have already been slashed from 4.5 per cent to 2 per cent in the past two months and the economy has continued to weaken at an alarming pace.

Britain is not alone. The Americans cut rates earlier and deeper than the Bank of England without slowing their economy's decline. Rates in the US are already effectively zero but Barack Obama warned yesterday that America could remain in recession for years without a massive package of tax cuts and government spending.

Both economies are suffering from the same problem - a lack of credit. People want to borrow to buy homes and companies want to borrow to fund their businesses. But the banks can't or won't lend.

As Justin King, the chief executive of Sainsbury, said yesterday, it is not how much you have to pay to borrow that is the issue, it is that there is no money being lent in the first place.

The cut in base rates will have at least some impact on the economy. Millions of mortgage borrowers will see their monthly bills fall and some of this should feed through into higher spending.

The effect will be partly offset by the impact on savers, who will see the meagre returns on their money shrink even further. The many companies, particularly small businesses, whose overdrafts and loans are linked to base rates, will also benefit.

Many economists believe that cutting rates also has an effect on confidence that is hard to measure. It shows that the authorities are at least doing something. This may partly explain why the Bank decided to cut by only half of one percentage point rather than the full point. It is highly likely that they will cut again soon. So why not just get on with it, ask the critics. However, members of the Monetary Policy Committee may have thought it would be better to keep some ammunition back.

After all, with rates this low they have little conventional firepower left.

Another reason for their caution may have been concern over sterling. The pound has fallen sharply in the last few months, which should stimulate the economy by helping exporters. But the Bank would not want to see the fall turn into a rout.

If rate cuts are largely beside the point, what is the answer? Almost certainly more taxpayers' money. Although the Government has ploughed billions into the banks already, it may have to put in more. So far it has invested a sum equivalent to 2.5 per cent of economic output. In previous banking crises, governments have had to fork out four times as much.

Yesterday Gordon Brown promised further measures to get the banks lending again. These could include extending the guarantees offered for bank borrowing or providing state backing for bank lending.

Mr Brown is also under pressure to provide further help to the economy through tax cuts and increased spending.

Most economists and business leaders believe the impact of the recent cut in VAT has been as disappointing as the effect of the interest rate cuts. The measures announced by the Government so far amount to at most 2 per cent of economic output. The package Mr Obama is talking is nearer 6 per cent of the American economy.

If Big Government is the answer, we will be paying the bills for many years to come.

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