Pressure mounts for 1% rate cut

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Experts said a fresh flood of dire economic news had raised the chances of a 1% interest rate cut from the Bank of England - the biggest since January 1993.

Anything less than a 1% cut would be "too little, too late" to combat the economy's steep decline, forecasters at the Ernst & Young ITEM Club warned.

The Bank's nine-strong Monetary Policy Committee (MPC) cut rates by 0.5% a month ago in response to the global banking crisis.

Since then official figures have shown UK output shrinking by a worse-than-expected 0.5% between July and September - the first quarter of contraction since 1992.

The UK's powerhouse services sector also shrank at its fastest pace for at least 12 years last month, while manufacturers saw a much bigger-than-expected fall in activity in September as the sector's worst decline for nearly 28 years continued.

Those on tracker mortgages pegged to the Bank's base rate should feel the full benefit of any cut. For those on standard variable rates a 1% cut would knock nearly £92 a month off the cost of a typical £150,000 mortgage - if passed on in full.

But lenders shaken by banking turmoil have been reluctant to pass on reductions in full to other borrowers as interbank lending rates - a key factor in pricing fixed-rate deals - remain high.

This could mean even deeper cuts are needed from the Bank, said Hetal Mehta, ITEM's senior economic adviser.

Interest rates were previously held at 5% for six months by the MPC due to inflation fears but are now set to tumble as recession concerns take centre stage.