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Richard Lambert, director general at the Confederation of British Industries (CBI), said: "This is a bold and welcome move by the Monetary Policy Committee.

“Business and consumer confidence has been deteriorating sharply in recent months, and recession has replaced inflation as the major threat to the economy over the next year or two.

He added: "This cut of one and a half percentage points should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers."

While Stephen Robertson, director general of the British Retail Consortium, said: “This is the kind of shock tactic that could get the economy’s heart beating again.

“This dramatic cut for Christmas could give customers the confidence to spend at what is many retailers’ most important time of the year.”

However, concerns remain that even this exceptional effort to shore up growth could not avert a sharp recession throughout next year, and that still more action would be needed to limit its scale.

Investors sent shares on London's FTSE 100 index down 158.25 points to 4,372.48 on fears the Bank of England had cut too deeply today, and had left itself no headroom to make additional reductions if today's move does not steady the economy.

David Kern, economic adviser to the British Chambers of Commerce said the group was supportive of today's move by the Bank of England.

But he said: "Emergency measures have the undesirable affect of unsettling the markets and undermine confidence.

"Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens.”

Another key worry is that banks that are still struggling with funding shortages in stressed money markets may fail to pass on today’s cut in base rates to borrowers.

There are also concerns that cheaper money will not be enough to persuade consumers to spend or businesses to invest as they confront the tough conditions of the coming year, greatly reducing any boost from rate cuts.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

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