THE Bank of England Monetary Policy Committee (MPC) meets today and a further cut in interest rates is almost certain.

But how big the cut will be is far from clear.

The MPC is walking a dangerous tightrope. Spending is drying up and more businesses are failing every day, so a cut in rates is required to build confidence and avoid the economy going into a tail-spin.

As we report today, members of The Northern Echo’s “shadow MPC” – made up of leading businessmen in our region – are in favour of another cut.

But too large a reduction too quickly could spark a run on the pound.

Sterling has already fallen by a quarter against the dollar this year, largely on fears that the UK’s recession will be longer and deeper than any of the other Western economies.

That is why credit default swap rates on long-term UK sovereign debt are already beginning to edge up. They signal growing unease at the size of the UK’s deficit and the Government’s ability to balance the books in the medium term.

If the value of sterling continues to fall there will come a tipping point at which it ceases to be a competitive advantage for exporters and becomes a problem. Imported goods, both consumer products and raw materials, will become more expensive, bringing low inflation to a sharp halt. This can happen despite rising unemployment and spare capacity in a domestic market.

If such a nightmare scenario emerges it would place the MPC in an impossible position – forced to increase interest rates at the very moment they should be kept low.

For those reasons, we believe the MPC should take a prudent view of interest rate reductions this week and draw the line at a one per cent cut.

Further cuts will undoubtedly follow in the New Year, but we do not believe that interest rate reductions alone will be enough to steer the country through this recession.