The decision made history. On January 8th the Bank of England cut the base rate from 2% to 1.5%, the lowest since the central bank was founded in 1694. The Bank of England's mission then was to provide war finance. Its task now is to fight a recession that looks increasingly likely to be the worst since the second world war.

The bank's latest move means that the base rate has now fallen by an extraordinary 3.5 percentage points since the start of October (see chart). It followed a clutch of closely watched business surveys of purchasing managers that painted a dismal picture of the economy in December. Manufacturing was mired in the deepest downturn since the survey started in 1992. Construction activity plumbed new depths. And activity in private services stayed close to its record low in November.

Another way in which monetary policy retains some of its clout is through the exchange rate. Ahead of the Bank of England's decision, the pound clambered back from near parity against the euro at the end of last year to 1.11 on January 7th as gathering gloom about the euro area's prospects led foreign-exchange dealers to factor in an early cut in European interest rates. But the hefty depreciation of around a quarter in sterling's trade-weighted value since mid-2007 will still bolster the economy by making British producers of tradable goods and services more competitive both in foreign markets and at home.

The fall in sterling will also blunt deflationary pressures that might otherwise exacerbate the credit crisis, since when prices start falling the burden of debt rises in real terms. As consumer-price inflation was still 4.1% in the year to November, deflation might seem a remote prospect. But inflation will tumble in the coming months because of lower oil prices and the recession.

... contd.