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Having sat on its hands in the summer while the economy was heading smack into the biggest recession in three decades, the Bank of England is now making up for lost time. Today's one-point cut in interest rates brings them down to 2% - a rate not seen for 57 years - and represents a 60% drop in official borrowing costs since early October.
What's more they will be going still lower in the new year as Threadneedle Street tries desperately to prevent a downturn it massively underestimated turning into a full-blown slump. In the entire history of the Bank of England, rates have never once dropped below 2%, but watch this space. It was clear from today's gloomy statement that the monetary policy committee still has work to do. Rates are heading for 1% - perhaps even lower.
The gloom that has descended on the economy over the past two months is so all-pervasive that there was some disappointment in the City that the rate cut was not even bigger. Some analysts had been calling for a second successive 1.5 point cut, but it was no real surprise that the Bank erred on the side of caution.
There were a number of reasons for this. One was that the MPC wants to leave itself some ammunition when the poor economic news continues to roll in over the coming months. Fiscal policy was eased aggressively in the pre-budget report and if the monetary weapon is also exhausted, policy makers would be in the position of seeming impotent in the face of economic distress.
A second factor was that the Bank is concerned about cutting too far, too fast and leaving the UK with a potential inflation problem when the economy does eventually pick up. Finally, the MPC is keeping a wary eye on the pound, which has fallen very sharply on the foreign exchanges, particularly against the dollar. With the government needing to flog gilts by the bucket load to fund the ballooning budget deficit, the Bank does not want to do anything that might precipitate a full-scale sterling crisis.
In the short-term though, it is clear that the threat of one big D - devaluation - has been outweighed by two other Ds - deflation and depression. Falling bank rate, plunging commodity prices and weakening growth mean that one measure of inflation - the Retail Prices Index - will turn negative early in the new year while the measure used for the government's inflation target - the consumer prices index - is also heading down sharply.
Up until the second world war, deflation was quite commonplace in Britain, but those were days when most people rented their homes and consumer credit was virtually unknown. The Bank has no particular desire to conduct an experiment on the impact of deflation - which increases the value of a borrower's debts - on a nation of spendthrifts.
While a temporary period of falling prices would make incomes go further, a prolonged bout of deflation would increase the risk of a depression. Why? Firstly, the real value of debt would rise. Secondly, it would be impossible for the Bank to reduce the real (inflation-adjusted) level of interest to zero or below. And thirdly, because consumers would have an incentive to defer purchases, safe in the knowledge that they will be cheaper in the future.
The impact of deflation is already evident in the housing market; prices are set to fall by perhaps 15-20% over the next year, so it makes sense for potential buyers to wait for values to bottom out before making an offer on a property.
The bottom line is this. Britain was bound to have a day of reckoning for the debt-fuelled spending spree in the boom years. That adjustment has been made more severe by the global downturn and by the Bank's dilatory behaviour in the first three quarters of 2008.
Interest rate cuts - while aggressive - have come too late to prevent an extremely painful recession. The Bank knows that all too well. Rates are at today's emergency levels because there is a threat of the worst recession in Britain since the 1930s.
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