Leading City economists said the rate cut would not be enough to stop the UK sliding into recession, and most agreed that the global crisis would force the Bank to cut rates again by the end of the year.
While the London stock market fell by almost 5 per cent at one point during the day, and industrialists dismissed the cut as "too little, too late", mortgage providers reacted quickly with many - including Abbey National and Nationwide - cutting rates by 0.3 percentage points.
There was strong criticism in the City of the political pressure they suspect the Bank has come under recently from the Treasury, after a variety of "hints" and "signals" by the Chancellor, Gordon Brown, and argued that Treasury-inspired leaks could compromise the Bank's independence.
The Treasury tried to dampen down speculation about the "covert campaign" to bounce the Bank into cutting rates, and reaffirmed the Chancellor's commitment to an independent central bank.
But Simon Briscoe, economist at investment bank Nikko Europe, said: "The Chancellor should not have engaged in cut speculation ... he should have instead seized the initiative and sent a short public letter to the Monetary Policy Committee, saying that the wider economic issues ought to take precedence over the normally strict interpretation of the inflation target. Rates could then have been cut in an environment of openness and transparency."
Explaining its decision to cut rates, the committee said: "The international economic and financial environment has deteriorated since the committee met in September. In the domestic economy, surveys and reports have indicated a decline in business and consumer confidence."
In China, the Prime Minister, Tony Blair, welcomed the cut as a move in the right direction. "If we have really turned the corner at 7.5 per cent interest rate, then that would be a tremendous achievement."
Ministers saw it as a downpayment pointing to further cuts in interest rates to avert a recession in the British economy and there were clear signs that the Government is expecting more cuts.
One insider said: "We don't think we will go into recession, but it is going to be difficult. We were always going to be affected by the world recession."
The Chancellor is expected to face renewed demands from Labour MPs for a bigger cut in interest rates when he makes his pre-Budget statement to the House of Commons at the end of the month.
William Hague, the Tory leader, called yesterday for the Government to put a moratorium on measures likely to increase business costs, including the minimum wage and trade union recognition.
Welcoming the cut, Francis Maude, the Tory Treasury spokesman, said interest rates would remain higher than they need for longer causing more pain for mortgage holders and businesses because of "Labour's blunders" on the economy.
The FTSE-100 index ended the day down 130 points at 4,698.9, having fallen to 4599.2 in mid-afternoon. Traders were disappointed that the Bank did not go for a 0.5 point interest rate cut, and were also unnerved by continued rumours of heavy losses at banks and in hedge funds.Reuse content