The Bank of England today took decisive action to shore up the economy and stave off a deep recession by ordering an aggressive cut in interest rates by 1.5 percentage points to 3 per cent, taking the base rate to its lowest level in more than half a century.

The drastic step, which reduced borrowing costs to a level not seen since May 1954, came as fears of a prolonged slump in Britain have multiplied after a deluge of dire economic data. At the same time, the European Central Bank cut borrowing costs by half a point to 3.25 per cent.

Today's surprise reduction by the Bank of England is the biggest cut since March 1981 when the interest rate was reduced by 2 percentage points. The last time borrowing costs were cut by 1.5 points was in August 1854.

The Bank of England’s move failed to calm investors and UK shares slid 5.7 percent, with banks and commodities skidding. The FTSE 100 ended down 258.32 points at 4,272.41 points.

In a statement accompanying today’s announcement, the Bank's Monetary Policy Committee said today: "There has been a very marked deterioration in the outlook for economic activity at home and abroad."

The Bank's move means that homeowners with a £150,000 interest-only tracker mortgage, which is pegged to the base rate, could save as much as £190 a month.

Homeowners repaying the capital as well as the interest on the loan will see a £133 saving on monthly payments.

Lloyds TSB, which is attempting to merge with HBOS, owner of Halifax and Bank of Scotland, today announced that it will pass on the full 1.5 per cent interest rate cut to its customers from the beginning of December.

Lloyds TSB is reducing its standard variable rate (SVR) to 5 per cent because of a clause in its mortgage contracts promising that its SVR will never be more than 2 percentage points above base.

Michael Coogan, director general of the Council of Mortgage Lenders, said: “What is important is how this feeds through to lenders’ borrowing costs - and lenders will need to balance the interests of savers, as well - but such a sharp downward movement provides more room for lower borrowing costs more quickly."

Banks are under growing pressure from the Government to pass on interest rate cuts to its mortgage customers after it emerged earlier this week that borrowers are still waiting to benefit from last month's half point reduction to borrowing costs.

On Tuesday, Lord Mandelson, the Business Secretary, strongly rebuked British banks for their failure to help customers by passing on lower interest rates.

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