The Bank of England has cut interest rates by one-and-a-half percent to 3%, its lowest since 1955.
Last month it cut rates from 5% to 4.5% in an emergency move co-ordinated with other central banks. There had been widespread calls from industry for a major cut as the country begins to face up to the prospect of a deep recession.
It is the most dramatic cut since a two percentage point reduction in 1981 but there have been concerns that it would not be passed on to borrowers.
Prime Minister Gordon Brown was asked about this problem in the House of Commons on Wednesday because Abbey had just raised its tracker mortgage rates for new customers.
"We want the banks and building societies to pass on the interest rate cuts to their mortgage holders," he said. "What we've been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary."
Significant cut as recession looms
However Lloyds TSB has promised to pass on the rate cut in full to its variable rate mortgage customers. The group, which also lends through Cheltenham & Gloucester says its standard variable rate, currently 6.5%, will never be more than 2% above Bank of England base rate.
The Bank of England's interest rate move came after a series of figures released this week provided further evidence that the UK economy is sliding towards recession. For example, new figures from the Halifax showed house prices fell by another 2.2% in October, pushing the drop in house prices to 13.7% over the past year.
It is hoped the interest rate cut will boost the economy – and both the prime minister and the chancellor Alistair Darling have been pressuring the Bank of England to cut the cost of borrowing as the threat of a long-lasting recession looms.
Banks under pressure to reduce borrowing costs
Responding to the pressure on banks to reduce the cost of borrowing to consumers, lenders have been quick to emphasise the costs they charge borrowers are linked to the London interbank offered rate (Libor) which has remained high during the credit crunch as banks have been unwilling to lend to each other.
The Council of Mortgage Lenders (CML) said: "The real cost of funds to lenders is determined not by the Bank base rate, but by their own cost of borrowing." However, some commentators have hit out at lenders for building up profit margins over passing on interest rate cuts.
Further cuts in the cost of borrowing are now expected in the coming months – with some analysts seeing the base rate dropping to unprecedented lows of one or two per cent.
