Was the Bank of England right to cut interest rates? 

At the end of July, Martin Weale, traditionally one of the Bank’s sharpest-taloned hawks, gave an interview in the Financial Times in which he said the flash PMI data, which measure business activity, were “a lot worse than I had thought” and showed “expectations have worsened sharply”.

Those flash figures were confirmed earlier this week – the final numbers were actually a little worse and showed that, between June and July, business activity suffered its worst one-month fall since records began in 1996; the index slipped to its lowest level since 2009 in the immediate aftermath of the financial crisis.

Were those levels to be repeated in August and September, UK GDP would likely contract by 0.4pc in the third quarter and the UK economy would be veering dangerously towards a technical recession (which is defined as two consecutive quarters of negative growth).

The data resulted in markets pricing in a rate cut with almost complete certainty giving the Bank little choice but to act. While it is not the Bank’s job to pander to market expectations, the last thing it would want to do in this febrile economic environment is surprise people.

That said, there was still some leeway. The last time PMIs suffered a similar fall to the one that occurred in July, the Bank cut rates by 0.5pc. Doing so now would take interest rates to zero. That is seriously contentious territory.

There are serious questions about the efficacy of cutting rates from record lows to fresh record lows and strong arguments that it could backfire (including whether monetary policy is the right means to counter the kind of supply-side shock the UK economy has just suffered).

Ultimately the Bank is trying to encourage people to borrow and spend, thereby boosting the economy. But taking interest rates into unchartered territory might spook people into believing things have got so bad they’d be better off biding their time.

Super low interest rates can also hurt banks, which make bigger profits when interest rates are higher. If lenders start countering low rates by charging customers more to take out loans then it would reduce the supply of credit and have the opposite effect to the one that the Bank intended.

Nevertheless, a majority of the MPC have indicated that they think rates will be cut to zero by the end of the year.

Alice is well and truly through the monetary looking glass. Mark Carney has himself said in the past that rate cuts can “perversely reduce credit availability or even increase its overall price”.

That is why the Bank is also making £100bn available for a "Term Funding Scheme", which is designed to help commercial banks pass on these ultra-low rates to their customers (whether those customers take advantage of them is another question entirely).

In many ways, the interest rate cut is largely symbolic – you wait seven and a half years for them to change and, when they do, they’re overshadowed by a blockbuster funding scheme and a big expansion to the Bank’s quantitative easing programme, which will be increased by £60bn over six months.

The Bank is also planning to buy up to £10bn of corporate bonds in an attempt to drive down funding costs and get companies investing again. These are far bigger measures than the market and economists had expected – and they were expecting quite a lot.

You can see why the Bank went for shock and awe. It is forecasting that the UK economy will avoid a recession – but only just. It has slashed its forecast for GDP growth in 2016 from 2.3pc to 0.8pc – the biggest cut since forecasts began in 1993. It thinks that the economy will only grow by a meagre 0.8pc in 2017. 

But the reality is that, as Mark Carney is fond of saying, there are limits to what the Bank can do. That’s especially true when interest rates are already so low. The Government will also need to step up its fiscal plans – some mixture of targeted tax cuts, infrastructure spending and deregulation – to boost the economy.

The Chancellor of the Exchequer Philip Hammond has said that the Government will take “any necessary steps” to support the economy. However, such measures are likely to be at least a couple of months off.

The Bank felt it had to err on the side of caution and do something – anything – to help prop up the economy in the meantime. It has probably played a bad hand as well as it could.