Interest rates hit 50-year low

The shock 1.5% cut by the Bank's Monetary Policy Committee (MPC) is the biggest single move since March 1981 and brings rates to levels not seen since 1955.

Experts predicted they could reach an all-time low of 1.5% by mid-2009 as the Bank acts to stave off the worst impact of an economic slump.

Borrowers on standard variable rate mortgages will see average monthly payments on a £150,000 mortgage fall by around £138 - if the cut is passed on in full. But lenders shaken by banking turmoil have been reluctant to pass on cuts in full as interbank lending rates - key in pricing fixed-rate deals - remain high.

Chief Secretary to the Treasury Yvette Cooper said ministers expect banks to pass on the cuts as rapidly as possible after shoring up the finances of several major players with taxpayers' cash. "The Government has stepped in to make the banking system safe, to support the banks. It is right now that the banks do their bit to support everybody else," she said.

But shadow chancellor George Osborne said: "This is a shot in the arm for the economy, but it shows how sick the patient is."

The Bank of England made the move because of the "substantial risk" of undershooting its 2% inflation target as a sharp recession looms in the wake of September's banking turmoil. "There has been a very marked deterioration in the outlook for economic activity at home and abroad," it said.

Its verdict came after the UK's first quarter of economic contraction since 1992 between July and September and further gloom for manufacturing and services firms this week.

Consumer confidence has also been battered by tumbling house prices and retailers predicted the cut could help salvage what is likely to be a desperate Christmas for the high street. British Retail Consortium director-general Stephen Robertson said: "This is the kind of shock tactic that could get the economy's heart beating again. This dramatic cut for Christmas could give customers the confidence to spend at what is many retailers' most important time of the year."

The deep cuts come despite the official measure of inflation standing at 5.2% - more than double the MPC's official 2% target - underlining how much the worries over an economic slump have grown.