Bank of England slashes interest rates to 2%

On another day of gruesome economic news it carved a full percentage point from its base rate, lowering it from three per cent to two.

The cost of borrowing was last at this level in November 1951 and has never been cheaper since the Bank was formed in 1694.

Gordon Brown said interest rates could fall further and did not rule out them dropping to zero. The Prime Minister added that all banks and building societies should lower their mortgage rates.

The cut will bring joy to up to 3.5 million homeowners on tracker mortgages that fall and rise in line with the Bank's base rate.

Borrowers with a typical £200,000 London mortgage will be around £113 better off each month when their new rates kick in on 1 January. However, about 600,000 with "collars" in their mortgage small print, including borrowers with Nationwide, will lose out because their rate is now frozen.

But the Halifax said it would not saddle its borrowers with a collar at three per cent, despite its own small print saying it had a right to do so.

Another 2.4 million homeowners with mortgages on standard variable rates will have to wait to see if their lenders pass on any or all of the cut. So far only Lloyds TSB, its mortgage off-shoot Cheltenham & Gloucester. and HSBC have said they will definitely pass on the full saving.

In total it is estimated that up to 500,000 London homeowners will miss out on today's rate cut. The scale of it was in line with City forecasts, although some commentators had been calling for even more radical action.

In a statement the Bank of England's Monetary Policy Committee said it had acted because of growing evidence of the scale of the downturn - almost certain to be confirmed as outright recession next month - and because of the lack of credit in the economy.

The Prime Minister said mortgage lenders must now act to cut rates: "They have got responsibilities. Many of them have voluntarily announced already, even in the last few minutes, that they are putting ... their mortgage rates down. I think all of the others should follow suit."

He branded it "unacceptable" that lenders had not lowered their variable mortgage rates following earlier cuts in interest rates.

The MPC said it had concluded "it was unlikely that a normal volume of lending would be restored without further measures".

It came on another gloomy day for jobs with 7,000 workers being told they were being made redundant. There was also grim figures from the motor industry with car sales at their lowest for 28 years.

The European Central Bank also today cut the interest rate on the euro with a 0.75 per cent fall to 2.5 per cent. It was the biggest cut in the 10-year history of the currency.

Further cuts in Britain are expected. Commentator Roger Bootle, of Capital Economics, said: "The key point is that in order to prevent the recession from turning into a depression, the MPC needs to cut interest rates to levels never seen before. I continue to think that it won't be long before interest rates are reduced to one per cent, and they may ultimately have to fall all the way to zero." Mayor Boris Johnson told bankers at a City Hall summit this afternoon that it was their responsibility to "unfreeze the rivers of credit".

Peter Bolton King, chief executive of the National Association of Estate Agents, said: "This cut, in reality, won't do enough unless the banks play fair and pass it on to homeowners. We are, once again, calling on all of the major lenders to commit to passing these savings on to the consumer."

The latest cut, the sixth in the past year, also came on a day of dire figures from the property market showing that the fall in values was far worse than even the depths of the last recession.

Figures from Halifax showed that house prices fell 2.6 per cent last month, taking the annual drop to 16.1 per cent. The average price of a UK house is now almost back to where it stood in July 2005 at £163,605.

The big base rate cut was warmly welcomed by industry and high street businesses. Stephen Robertson, director general of the British Retail Consortium, said: "This is exactly the type of decisive action we need during these uncertain times. Decisions now will greatly influence how long and deep the recession is."

TUC General Secretary Brendan Barber said: "This decision was spot on. The Bank of England could not be clearer about what it expects the high street banks to do."