It is time for a rethink.

Some time ago this column predicted zero interest rates soon in the UK. Since then, the list of economists who have joined the zero rates club has grown. But then again, since then, the pound has leapt off the edge of a cliff. Back on 17 October, when the headline here said “could rates fall to zero”, there were 1.29 euros to the pound. This time last year, there were 1.34 euros to the pound. If, like the author of this publication, you didn’t take a holiday last year, and your last sojourn in the sun was the summer of 2007, then back then you would have enjoyed an exchange rate of 1.48. But by the end of 2008 we were just two cents from parity. Sterling had crashed by 20 per cent in just two months, or by 24 per cent in a year, or by 31 percent in 18 months.

It has been argued here that a cheaper pound is a good thing. The UK economy was out of balance. We bought too much from abroad, and didn’t sell enough. The pound was propped up by money flowing in from overseas.

But there comes a time when the fall in sterling becomes dangerous. We are close to that moment.

This means the Bank of England needs to do a rethink. It is due to make its next rate of interest announcement tomorrow. Most expect something big. Maybe, though, now is the time for a different approach.

It is not being suggested here, by the way, that we are against seeing big cuts in rates this year. Simply it is being argued the time is not right.

Economists in the Eurozone are waking up to the reality that this is not just an Anglo-Saxon crisis. Eurozone inflation is falling like a stone. The latest data out yesterday revealed that Eurozone inflation has fallen from 2.1 per cent in November to just 1.6 per cent in December.

In the last few days, the pound–euro exchange rate has gone into something of a reverse. At the time of writing, there were 1.09 euros to the pound. This is no bad thing. If the UK can not become competitive at the current exchange rate, then frankly nothing will do it.

Even at the current exchange rate there will be a nasty price hike shortly. Once shops have gone though their present inventory, it seems likely there will be a one-off price hike across the High Street. It won’t necessarily be inflation – because wages are unlikely to rise – instead we may see a one-off fall in affordability.

For that reason, the Bank of England played it cool this month. Let the European Central Bank make the big rate cut, and then let the Bank of England follow suit the following month.

Just as a few months ago the voices predicting zero rates were few and far between, there are now a few voices saying rates have fallen far enough. Writing in the Telegraph, two of the leading government advisers on the economy over the last two decades, Tim Congdon and Gordon Pepper, argued the government now needs to borrow money from the banks and inject this into the economy.

It certainly seems that the rate of interest as a tool for steering the economy is impotent. All that cuts in interest rates seem to be achieving are falls in the pound.

Right now, Gordon Brown is taking a leaf out of Keynes’ book and attempting to boost the economy via spending.

But the monetarists would argue that the Keynes remedy was false. The economic depression of the 1930s was caused, so they argue, because there simply wasn’t enough money floating around.

It seems that for the time being, the Bank of England and the government need to focus on getting more money out there, rather than reducing the cost of borrowing. People are in too much debt to consider borrowing more. So even if banks were more willing to lend, it seems doubtful the demand for credit would rise significantly.

Instead of cutting rates, which will immediately lead to a fall in sterling, the Bank of England needs to buy government bonds, or even corporate debt. That way, new money will be pumped into the system. This will be more effective than rate cuts, and won’t immediately lead to falls in sterling.