Bank cuts interest rate to record low

The latest cut, the sixth since October, immediately triggered warnings that free accounts were doomed because of the squeeze on bank profit margins.

One bank chief told the Standard that as interest rates approach zero: "We will have to start charging again."

The warning came on another historic day for the economy when:

● The Bank of England said it was having to cut the cost of borrowing yet again because of "depressed confidence and persistent problems in international credit markets". About three million homeowners on tracker mortgages will see an immediate saving.

● It also admitted that rate cuts alone were not doing enough to revive the economy and authorised a £75 billion injection of cash into the banking system through so called quantitative easing. The radical move to "print money" aims to stop the recession turning into a deflation-fuelled depression.

● Economists at PricewaterhouseCoopers predicted gross domestic product will fall five per cent this year — far worse than Treasury forecasts — and drop a further two per cent next year.

● Halifax said house prices fell 2.3 per cent last month, bringing the year-on-year slump to 17.7 per cent.

The Bank cut interest rates from one per cent to a new 315-year low. Rates were at five per cent in October when the monthly reductions began.

After today's cut financial experts said the banking industry was rapidly preparing for the death of the British tradition of no-fee banking for accounts in credit.

Kevin Mountford, head of current accounts at financial website Moneysupermarket.com, said: "Banks have to recoup their margin from somewhere. If ever they are going to move to a fee-based system, now is the time with so much going on."

Andrew Hagger of rival website Moneynet.co.uk, said: "It is coming. Some of the banks are already starting to position themselves for the end of free banking. It may not be as blatant as a £5-a-month charge, it will be something more creative." Britain is the only major world economy where most bank customers who stay in credit are not charged.

However, an estimated 10 million customers have already been moved over to so called "packaged accounts" which charge a monthly fee in return for added features such as travel insurance.

Another major threat to free banking is an OFT investigation into bank charges that could put a cap on the fees for unauthorised overdrafts.

The Bank of England's move to pump £75 billion of newly-created money into the economy over the next three months is a landmark decision.

Quantitative easing is a policy so far untried in the UK. With the recession showing no signs of easing, the Bank has warned of a dangerous period of deflation as prices tumble.

With its arsenal against deflation almost exhausted it today turned to "unconventional" measures to boost spending and drive a recovery.

Chancellor Alistair Darling gave the Bank permission to create up to £150 billion of new money to pump into the economy and Bank governor Mervyn King today said the first £75 billion will be created in the next three months.

The Bank will not literally start printing new £10, £20 and £50 notes but instead buy assets such as gilts and corporate debt off banks by electronically transferring money into their accounts.

It is hoped the banks will use the extra money to increase lending to businesses and consumers who will then spend it and help drive an economic recovery.

In a letter to Mr King, the Chancellor said it was "appropriate to consider additional instruments" to stave off recession, prevent deflation and return inflation to its target of two per cent.

One leading banker welcomed the move saying: "The world needs a short burst of stimulus and this is the right way to achieve it."

However, there are fears the increased supply of money could send inflation spiralling. Shadow chancellor George Osborne said the Bank's move was "a leap in the dark". He said: "Given that the Government's other measures have completely failed and the recession continues to get worse, this was a last resort. I don't think anyone should be pleased that we have reached this point. It is an admission of failure and carries considerable risk.

"Let us hope that this approach taken by the Bank of England does lead to an easing of credit conditions. This is a leap in the dark."

Stephen Gifford, chief economist at accountant Grant Thornton, said: "It is a high risk strategy riddled with economic, political and practical problems. Few policy makers have any experience of implementing it and how much easing is appropriate is largely guess work."

Ian McCafferty, CBI chief economist, said: "With interest rates already at historic lows, the conventional rate cutting tool is becoming less and less effective as a means of stimulating the economy.

"Though this latest cut will help support business and consumer confidence, it is unlikely to have a dramatic impact on the cost or availability of credit.

"A swift move towards quantitative easing as a way of boosting money supply and lending directly is now the MPC's best bet for supporting the economy and getting credit flowing again."