Britain’s banks came under intense pressure to cut mortgage rates last night after the Bank of England stunned the City and cut the base rate to a 54-year low to fight off recession.

Official interest rates were slashed by one and a half points to 3 per cent at midday. Lenders scrambled to withdraw tracker deals, which are linked to the base rate. Last night just a handful of lenders were still offering tracker deals to new customers.

The cut was the biggest since a two-point reduction in 1981, suggesting that the Bank fears a prolonged slump. There was speculation that it could be followed by tax cuts for those on low incomes in the PreBudget Report this month. Gordon Brown will urge other European leaders today to stimulate their economies, citing Britain’s tax cut in May and higher borrowing announced by Germany this week.

The International Monetary Fund gave warning that next year would be Britain’s toughest since 1991. It predicted that the economy would shrink by 1.3 per cent – the biggest fall in GDP since 1991. This would leave Britain by far the worst performer among the world’s leading industrial countries. It also factored in a global recession for the first time, saying that the world’s developed economies as a whole were headed for their first full-year contraction since the Second World War.

House prices fell by 14.9 per cent in the year to October – the steepest fall since records began in 1983 – according to Halifax, Britain’s biggest lender. The average home now costs £168,176, according to Halifax, down £29,522 since October last year.

If the rate cut is passed on in full, a borrower with a £150,000 mortgage pegged at a standard variable rate of 6.5 per cent would see monthly payments fall by nearly £140 a month.

The lenders will meet ministers and business organisations next Tuesday. Alistair Darling said that it was essential that they passed the rate cut on to customers. Lenders are reluctant to do so while interbank lending rates, or Libor, remain high.

John McFall, chairman of the Commons Treasury Committee, told The Times:“These guys came in with some pretty big begging bowls asking for taxpayers’ money. They are displaying an alarming lack of social conscience. They should pass on the cuts in full.”

Yvette Cooper, Chief Secretary to the Treasury, said that ministers expected banks to pass on the cuts as fast as possible. “The Government has stepped in to make the banking system safe, to support the banks,” she said. “It is right now that the banks do their bit to support everybody else.”

All day there were signs that they were dragging their heels. The borrowers able to celebrate were those already on tracker deals, who could see repayments fall by more than £100 a month. The Council of Mortgage Lenders estimates that nearly one in ten borrowers is paying standard variable rate, while about 40 per cent are on tracker deals. Only Lloyds TSB and Abbey said they would cut standard variable rates by one and a half points.

One business leader said that bank managers were being “sticky, tough and tight” with small businesses. Stephen Alambritis, of the Federation of Small Business, said: “The banks have a moral obligation to pass on this rate cut, and reverse recent rate rises.”

The British Bankers’ Association said that it was a commercial decision by individual banks whether to pass on cuts or not. It said the cost of borrowing was linked to interbank lending rates, which have risen sharply.

The Bank said that although inflation was a worry earlier this year, the risks had shifted decisively. There was now a danger that the severity of the downturn would drive inflation below target. Indicators pointed to the economy suffering a “continued severe contraction in the near-term”, it said.

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