Lifelines for borrowers and banks

Borrowers and banks were thrown lifelines tonight in a far-reaching attempt to salvage the ailing world economy.

The Bank of England cut interest rates by 0.5 per cent to 4.5 per cent as part of a global response to the meltdown in financial markets - the first co-ordinated action since the 9/11 terrorist attacks.

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Central banks across Europe, the US, Canada and China reduced interest rates in an emergency move.

UK taxpayers were told hours earlier they will fund a £50 billion part-nationalisation of major banks under a Government rescue plan - with a further £250 billion in taxpayer guarantees for banks.

But the extraordinary measures provided little respite for stock markets, with turmoil quick to return to London's blue-chip share index as fears mounted of a global recession. The UK's benchmark FTSE 100 Index closed down more than 5 per cent today.

Prime Minister Gordon Brown today described the plans for the banking sector as "bold and far-reaching" but admitted the measures would offer no quick fix.

Public cash will be used to buy stakes in stricken banks under plans unveiled by Chancellor Alistair Darling.

Eight UK banks and building societies - including Royal Bank of Scotland, Barclays, Halifax Bank of Scotland, Lloyds TSB and Nationwide - have pledged to increase their capital by £25 billion but Government will pump in the funds if called upon.

The Treasury also stands ready to make at least another £25 billion available if necessary.

The Bank of England - alongside its interest rate reduction - is also taking emergency action to help ensure that banks have enough cash to run their day-to-day activities.

It has increased the size of its Special Liquidity Scheme that allows banks to swap risky assets for Treasury bonds to £200 billion.

The Government is also making a further £250 billion available for banks to guarantee debt although a fee will be charged.

Mr Brown also moved to reassure that taxpayers would have the potential to "earn a proper return" from their investment.

The cut in rates will mean a saving of around £47 a month on a typical £150,000 mortgage if the reduction is passed on in full by lenders.

A number of major banks - including Lloyds TSB, Royal Bank of Scotland and Britain's biggest mortgage lender Halifax - passed on the rate cut to borrowers with standard variable rates.

Business leaders welcomed the move but said more cuts were needed to restore confidence and prevent a prolonged recession.

Howard Archer, chief European and UK economist at Global Insight, predicted interest rates could be as low as 4 per cent by the end of the year as economic fears take hold.

The Bank has kept rates on hold at 5 per cent since April as policymakers worried about soaring oil, food and energy costs. Inflation reached 4.7 per cent in August, more than double the official 2 per cent target.

But rate-setters said inflation fears had diminished as the economic outlook had taken a "decisive" turn for the worst.

The International Monetary Fund fuelled concerns about a recession warning "the world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s".

Central banks around the world cut interest rates in today's economic assault with the European Central Bank, the US Federal Reserve, Sweden's Riksbank, The Swiss National Bank and the Bank of Canada all reducing rates by a half-point, while China cut rates for the second time in three weeks.

Mr Darling is due to fly to Washington tomorrow to discuss global action on the financial crisis.

It is hoped the Government's banking package will provide the capital boost needed to get banks lending to each other again.

In return, the Government is demanding that banks cap executive pay and shareholder dividends and commit to supporting lending to homebuyers and small businesses.

The Prime Minister added there would be "strings attached and conditions to be met" to ensure taxpayer interests were protected.

The steps taken to breathe life into the economy follow devastating recent falls on the London market with banking shares under severe pressure.

RBS has been one of the worst affected in recent days suffering a near 40 per cent plunge in value on Tuesday.

The following banks have signed-up: Abbey, Barclays, HBOS, HSBC Bank, Lloyds TSB, RBS, Standard Chartered and Britain's biggest mutual, Nationwide Building Society.

HSBC said that while it was eligible for the recapitalisation scheme, it had no plans to take up the deal, as funding could be covered by "internal resources".

The Government is now in talks with UK banks over the level of individual take-up and terms of the deals.

Details of today's stake-buying scheme revealed that taxpayers will buy preference shares in the banks, which means they will be first in line for the pay-out of dividends.

Meanwhile, two banks - Lloyds TSB and Britain's biggest mortgage lender Halifax - passed on the rate cut to borrowers with standard variable rates.

Today's cut will mean a saving of £47 a month on a £150,000 mortgage if the reduction is passed on in full by lenders.

Economists said there would be more reductions to come.

The Bank had kept rates on hold at 5 per cent since April as policymakers worried about soaring oil, food and energy costs. Inflation reached 4.7 per cent in August, more than double the official 2 per cent target.

But rate-setters said inflation fears had diminished while the "recent intensification" of the financial crisis had "augmented the downside risks to growth" - Bank-speak for recession worries.

Its statement warned: "Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially."

The steps taken today to breathe life into the economy follow devastating falls on the London market, with bank shares under severe pressure.

RBS had been one of the worst affected in recent days, suffering a near 40 per cent plunge in value yesterday.

A newspaper report said that RBS bosses, chief executive Sir Fred Goodwin and chairman Sir Tom McKillop, had offered to leave under a boardroom clear-out agreed with the Government, but this was denied by the bank and the Chancellor.

RBS is one of eight institutions so far that have been given access to the scheme.

The following banks have signed-up: Abbey, Barclays, HBOS, HSBC Bank, Lloyds TSB, RBS, Standard Chartered and Britain's biggest mutual, Nationwide Building Society.

HSBC said that while it was eligible for the recapitalisation scheme, it had no plans to take up the deal, as funding could be covered by "internal resources".

The Government is now in talks with UK banks over the level of individual take-up and terms of the deals.

Details of today's stake-buying scheme revealed that taxpayers will buy preference shares in the banks, which means they will be first in line for the pay-out of dividends.

The Prime Minister moved to reassure that taxpayer interests would be protected.

In a Downing Street conference this morning, he said there would be "strings attached and conditions to be met".