At the same time, the rate cut means savers will be hit, with rates paid by banks and building societies on deposit accounts falling by a similar amount.
What are the options for risk-averse savers? Should they place their money in a fixed-interest account to take advantage of current rates? Or is it possible to sit things out for a few months and leave money in one of the many high-rate accounts now on offer?
We need to look at what fixed rates are currently on offer. To be honest, they are not very high, due partly to the fact that many institutions are already discounting the likelihood of rate cuts over the next 18 months. But with rates tumbling by 0.5 per cent in one fell swoop, they are not likely to be around for long.
According to the latest issue of MoneyFacts, Frizzell Bank, now owned by Liverpool Victoria Friendly Society, has a range of fixed-rate investments available, on which the minimum deposit is pounds 1,000. These include a one- year deal, pegged at 6.75 per cent gross, a two-year rate at 6.6 per cent gross and a four- and five-year fix paying 6.55 and 6.5 per cent respectively.
On minimum balances of pounds 2,500, Frizzell increases its rates to 7 per cent for the one-year deal, down to 6.75 per cent gross over five years. Meanwhile, Investec Bank offers a one-year bond at 7.25 per cent, with a minimum deposit of pounds 2,001, while Leeds & Holbeck Building Society has a bond paying 7.05 per cent on minimum deposits of pounds 3,000. Portman Building Society also offers a one-year fixed-rate bond paying 6.75 per cent on minimum deposits of pounds 500.
Frankly, these rates - while attractive - don't compare very well with those available from a range of instant-access accounts from insurers and supermarket groups.
For example, Egg, the new initiative from Prudential, pays a gross rate of 8 per cent on deposits as small as pounds 1, while Standard Life Bank offers 7.35 per cent gross starting from the same amount. For those with a little more money, Safeway offers tiered rates of interest, starting at 4 per cent on pounds 1, rising to 6.75 per cent gross for sums above pounds 500 and 7.5 per cent after an account hits pounds 1,000 or more.
What this implies is that - for the moment at least - it pays to leave your money in an instant deposit account. But don't leave it too long. Had the MPC announced a cut of 0.25 per cent it might have been possible to postpone a decision for weeks or months. This is less of an option now.
Although economists believe further rate cuts on the scale seen this week are unlikely in the immediate term, they will continue to fall. The tranches of money allocated to some of the fixed rates currently on offer will dry up in the next few weeks, while rates paid on instant-access deposit accounts will start to fall within days. It does make sense for risk-averse savers to take advantage of the fixed rates now available.
Equally important is the role of Tessas as a form of long-term saving. At present, variable-rate Tessas are available from Darlington, Lambeth and Ipswich building societies at more than 8 per cent. Saga, the organisation for over-55s, is also paying 8.05. It is hard to see these rates staying as high for long. If you have pounds 6,600 or more to spare, NatWest's fixed- rate Tessa, paying 6.71 per cent, could be a good deal. Grab one quickly.Reuse content