Bank Of England Slashes Interest Rates To 3%

The Bank of England has reduced interest rates by 1.5% in a dramatic attempt to rescue Britain from the grip of recession.

The cut - which takes interest rates to 3% - follows widespread calls from industry for a major reduction, as the country faces the prospect of a deep recession. It also comes on the back of an emergency half-point cut last month.

The last time the interest rate reached the shockingly low figure was in 1955.

The central bank has not cut interest rates by more than half a point since it was made independent in 1997.

Business leaders immediately welcomed the news, from the Bank's Monetary Policy Committee (MPC), and homeowners are likely to hail the cuts.

Prime Minister Gordon Brown was asked yesterday in the House of Commons, if a cut could be passed on to borrowers.

He responded: "We want the banks and building societies to pass on the interest rate cuts to their mortgage holders.

"What we've been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary."

There have been widespread concerns that the rate cut would not reach borrowers, however, Lloyds TSB have confirmed they would be passing the full 1.5% reduction to its variable rate mortgage customers.

The group - which lends through Cheltenham & Gloucester - confirmed its standard variable rate, which is at 6.5%, would never exceed 2% more than the BoE base rate.

A Council of Mortgage Lenders spokeswoman said: "The real cost of funds to lenders is determined not by the bank base rate, but by their own cost of borrowing.

"So it does not make commercial sense to insist or expect that lenders automatically 'pass on' cuts in Bank rate to borrowers, other than those with Bank rate tracker mortgages, unless and until the cut flows through to an equivalent reduction in their own funding costs."

Britain's economy has shrunk 0.5% in the third quarter, and many experts fear a recovery will not be on the horizon until 2010.

Fears of a recession were also further heightened with news of the service sector shrinking at its fastest rate in at least 12 years, and manufacturing output falling for a seventh month in a row.

While the interest cut is not likely to bring the country out of a recession, industry experts believe the news will be a welcome relief to homeowners, who have tracker mortgages.

(JM)