Bank cuts interest rate to 5.5%

The pre-Christmas boost for borrowers will see the Bank's base rate fall by a quarter of a percentage point to 5.5% - the first reduction since August 2005.

Calls for a cut intensified this week after evidence of crumbling confidence in the housing market and retail sector.

The decision of the Bank's nine-strong Monetary Policy Committee (MPC) had been seen as too close to call, with members wary that cutting rates too early could push inflation beyond its 2% target.

However, the credit crunch has returned in the last month, effectively tightening monetary policy after the rate at which banks lend to each other - known as Libor - soared.

The quarter point reduction to 5.5% could knock around £16 a month off the cost of a typical £100,000 mortgage.

However, Ray Boulger, senior technical manager at John Charcol, warned that the majority of lenders were unlikely to pass on any cut in full, while some may not reduce their rates at all.

With Libor, on which standard variable rates (SVRs) are based, at around 6.6%, lenders could look to recoup some of their margins through SVRs.

As well as five interest rate rises since August of last year, households are faced with petrol costs of £1 a litre and higher food bills.

The Bank said in a statement: "Although upside risks to inflation remain, which the committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term."