Bank slashes interest rates by 1.5%

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The unexpectedly large cut brings official interest rates to 3% and was immediately welcomed by business leaders.

The move from the Bank's Monetary Policy Committee (MPC) comes as the UK sinks further into economic gloom.

The rate cut is the biggest in the UK since a 2% cut in March 1981 - when the country was gripped by recession in the early years of Margaret Thatcher's government. It brings rates to their lowest level since 1955.

The Bank of England said it made the move because of the "substantial risk" of undershooting its 2% inflation target as a sharp recession looms.

"There has been a very marked deterioration in the outlook for economic activity at home and abroad. Since mid-September, the global banking system has experienced its most serious disruption for almost a century.

"While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time.

"As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries."

Lloyds TSB announced it was passing on the full 1.5% cut in interest rates to its variable rate mortgage customers. The group, which also lends under the Cheltenham & Gloucester brand, is reducing its standard variable mortgage rate (SVR) from 6.5% to 5% from November 1.

But other lenders were slower to respond, with all of the major groups, including the UK's biggest lender Halifax, saying their rates were under review.