Bank of England cuts interest rates to 3.75 per cent – the lowest since 1955

Interest rates fell to their lowest level in almost half a century when the Bank of England stunned financial markets yesterday by cutting the cost of borrowing to 3.75 per cent.

The quarter-point reduction took rates down to a level not seen since 1955 and prompted immediate talk that the Bank could cut rates again if the economic outlook deteriorated further in coming months. It is a calculated gamble that lower rates will shore up consumer and business confidence in the face of the looming Gulf conflict and world economic downturn – without fuelling the continuing boom in house prices.

Business and trade union leaders welcomed the decision by the Bank's Monetary Policy Committee as a "shot in the arm" for the economy but John Butler of HSBC bank said: "The Bank of England has probably taken the biggest gamble any central bank has done in years." Explaining its decision, the MPC said although inflation was above its target rate of 2.5 per cent, "the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated".

The financial markets initially reacted positively to the news, with shares reversing earlier losses but, by the end of the day, they returned to their downward spiral, the FTSE 100 index of leading stocks closing 81.7 points or 2.2 per cent lower.

Whether banks and building societies would cut the cost of home loans was not immediately clear. Most said they were reviewing their position. Earlier this week, Britain's biggest mortgage lender, Halifax, said the housing market remained buoyant with prices up 1.5 per cent in January and 25 per cent up over the past year.

But this week has also seen a slew of job losses in manufacturing, telecoms and the hard-pressed travel trade.