The Bank of England’s Monetary Policy Committee (MPC) considered cutting interest rates by 2 per cent earlier this month, but judged that such a large reduction could force sterling to fall heavily.

Minutes from the MPC meeting in October, where the nine-member committee voted unanimously in favour of a 1.5 per cent rate cut, reveal that a deeper 200 basis points reduction was considered.

But the minutes said: “Too large a surprise could pose upside risks to the inflation target if the resulting depreciation of sterling was excessive.”

However, the fact that such a steep reduction was discussed suggests that the MPC is willing to make further reductions to borrowing costs. However, the committee said it would wait to see what fiscal stimulus is offered in the Pre-Budget Report due to be published on Monday.

Sterling rose slightly today after publication of the minutes to $1.5049 against yesterday's close of $1.5046.

Howard Archer, chief UK and European economist at IHS Global Insight, the economic consultancy, said: "If the Government's planned stimulus is at the top end of the £15 billion-£30 billion range being bandied about, then the Bank of England is unlikely to cut interest rates by more than 50 basis points from 3 per cent to 2.5 per cent in December.

“However, a smaller fiscal stimulus could see the bank cut interest rates by up to 100 basis points next month.”

But Jonathan Loynes, of Capital Economics, said: “We see nothing to stand in the way of another big rate cut, of perhaps 100 basis points at December’s meeting and still see rates getting to 1 per cent or below next year."

At the meeting in October, all nine MPC members believed that a 1.5 per cent cut, which took rates to a 54-year low of 3 per cent, was warranted, given the deterioration in the British economy.

The Bank also forecast earlier this month that inflation, which spiked to a 16-year high in September, would fall sharply — leaving the way clear for aggressive rate cuts.

This was confirmed yesterday as inflation fell at the fastest rate in 16 years, fuelling fears that a 1930s-style bout of deflation could be the next risk for the economy.

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