The Bank of England’s Monetary Policy Committee today voted to reduce the official bank rate paid on commercial bank reserves by 0.5 percentage points to one per cent.
In a statement, the bank said that the global economy is in the throes of a severe and synchronised downturn and that output in the advanced economies fell sharply in the fourth quarter of 2008.
It added that growth in the emerging market economies appears to have slowed markedly.
Credit conditions faced by companies and households have tightened further.
The bank added that the underlying picture for consumer spending appears weak.
Businesses have responded to the worsening outlook by running down inventories, cutting production, scaling back investment plans and shedding labour.
Inflation is expected to fall to below the per cent target by the second half of the year, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in value added tax.
Commenting on the decision, Ian McCafferty, the CBI's chief economic adviser, said: 'This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy.
'But at these very low levels of interest rates and with the credit mechanism still impaired, it is vital that the bank swiftly supplements today’s move with direct intervention in the corporate-lending markets.
'With growing evidence of how severe the recession is, the bank needed to cut rates today,' said Steve Radley, chief economist at EEF, the manufacturers’ organisation.
'However, the government now needs to move swiftly to ensure that the other weapons in its armoury are in place to fight the recession.
'Further delays will increase the risk of more business failures and job cuts.'