The Bank of England today cut interest rates by a quarter point to 5.25 per cent despite calls for a half-point cut.

The widely expected quarter point cut by the Central Bank was modest compared to the recent cuts made by the Federal Reserve in the US and came amid calls for a half point cut. But the signs are that they Bank was curbed from making a more drastic cut by inflationary pressures.

The CBI said the rate cut should help minimise the effects of the current economic slowdown. Ian McCafferty, CBI Chief Economic Adviser, said: "This should help ensure that there is a soft landing to the slowdown now underway. Looking ahead though, the Bank must balance the effect that cutting rates while inflation is rising might have on its credibility."

The Bank's move will also be welcomed by many mortgage borrowers, but homeowners who do not have a mortgage deal directly linked to the base rate may be disappointed as some lenders have been increasing their own rates in anticipation of a cut.

However, many banks were quick off the mark to announce they were cutting their rates. Cheltenham and Gloucester, Lloyds TSB, RBS, Natwest, Abbey, Nationwide, Woolwich. HSBC and First Direct will all pass on the quarter point rate cut.

Michael Coogan, director general of the Council of Mortgage Lenders, said: “Borrowers should not expect that a base rate reduction will automatically result in a cut in standard variable rates or discounted rates across the market."

The decision by the Bank of England's Monetary Policy Committee comes as more evidence emerges of a slowdown in economic growth both in the UK and overseas.

Mervyn King, the Governor of the Bank of England, said recently that the current rate of 5.5 per cent is "bearing down on demand."

An important survey for Bank of England policymakers released several days ago showed that while Britain’s service sector grew at a faster rate than expected in January, confidence among purchasing managers fell to its lowest level in six years.

Manufacturing growth in the UK also slowed to a two and half year low in January raising fears of a reduction in GDP, the measure of how much the economy is growing.

Retail sales were also weak in January.

But the Bank's hands were tied from making a more dramatic move by inflationary pressures. While the Federal Reserve's central mandate is to ensure economic growth, UK rate-setters are focused on keeping inflation at 2 per cent, giving them much less room to move.

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: “The Bank has been fighting a battle against inflation for some time now and so it had to encourage some slowdown in the economy, by raising rates to 5.75 per cent last year. As for the future; we can probably expect to see a modest rate cut in the spring, most likely in May, when evidence of a slowdown will be clearer. "

The Bank's MPC also had access to the latest inflation figures during its deliberations. These will not be released publicly until next week, but today's move indicates that they presented a challenge for the panel.

Analysts called for another cut in the coming months. David Kern, Economic Adviser to the British Chambers of Commerce. said:

Ben Thompson, of Legal & General Mortgages, said: "Today’s rate cut was a dead cert but at least one more is needed this year to kick-start the mortgage market again. While council tax, utility bills and household costs have risen by more than a third in the past four years, the average family is £1300 worse off a year."

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