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These are now uncharted waters. The Bank of England has been in existence since 1694 but never, not even during the Great Depression of the 1930s, have interest rates been below 2%.
Less than six months ago, the Bank's monetary policy committee was fretting about the risk of a wage-price spiral and considered raising borrowing costs. Now there is a sense of desperation as policy makers try to find a way of kick-starting the economy.
Today's decision poses three big questions. First, why did the Bank limit itself to a half-point cut rather than reduce them to zero, as the US Federal Reserve has done? The MPC almost certainly did discuss whether to go for broke, but doing so would have left the Bank with nothing to announce when, as is certain, further business collapses and job losses are announced over the coming months. Interest rates are still likely to get to zero but will do so in several gradual steps.
Another reason for the more cautious approach is that the Bank is worried about the weakness of the pound, fearing that a bigger cut would have sent sterling into a fresh tailspin. The Bank is also concerned that traditional monetary policy – boosting growth through cuts in short-term interest rates – is no longer particularly effective. With banks unwilling to lend and consumer confidence at rock bottom, that is clearly the case.
The second question, then, is what happens now. The statement accompanying the MPC's decision mentioned alternative measures to increase lending and that means the policy known as quantitative easing, which both the Bank and the Treasury are carefully studying. Under this scheme, first unveiled in the 1930s, the government buys up bonds in order to flood the banking system with cash. If quantitative easing doesn't work, policy*makers will be left with no choice but to borrow more themselves to boost the economy through higher public spending and tax cuts.
Finally, there is the obvious question of whether all this will work. The answer is that nobody knows. Policymakers have never been in control of this crisis since it erupted 18 months ago and, despite attempts to provide reassurance, they are still blundering around in the dark. It is possible that the policy activism – which has been extraordinary by modern standards – might work. Recessions, even serious ones, do not last for ever and this one is no exception. The severity of the credit crunch, the depth of the housing crash and policy blunders last year mean, though, that we face the prospect of the most severe downturn since the second world war.
Even if the policy works, there are dangers. Artificially ramping up the bond market risks replacing a housing bubble with a bond bubble, which would burst with direr consequences if the markets became concerned that printing money was a recipe for inflation. It would be an entirely pyrrhic victory if the solution to the crisis was a return to the bubble world that existed before August 2007.
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