The economy is plunging deeper into recession despite emergency tax cuts and the multibillion-pound bank bailout, the Bank of England said yesterday.

Cutting the base rate to its lowest level in more than 50 years, the Bank said the outlook now was worse than a month ago, with manufacturing and consumer spending in sharp decline.

The one-point cut left the base rate at 2 per cent, its lowest since 1951, but economists are forecasting already that the cost of borrowing could fall further, with a base rate of zero per cent no longer out of the question. The Bank’s dramatic move followed a relentless stream of dire economic news over the past four weeks that has fuelled fears that Britain’s plight will be worse than the recession of the early 1990s.

The Bank, which cut rates by 1.5 percentage points in November, acknowledged the risk of a deep, prolonged recession yesterday. It conceded that more will need to be done to jump-start stalled growth, and paved the way for further rate cuts. In a bleak assessment, it said: “Business surveys have weakened further and suggest that the downturn has gathered pace. Consumer spending and business investment have stalled.”

Times Archive, 1951: First rise in 11 years takes rate to 2.5%

Clearly, simply, and starkly, the Chancellor presented the most up-to-date picture of the country's economic plight

• Times Archive, 1932: Crisis pushes rates to 2%

• Times Archive, 1939: Bank rate back to pre-war 2%

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Last month the Bank predicted that the economy would shrink next year by 1.3 per cent, its worst performance since 1991, It now admits that conditions have since grown more grim.

There was now “a weaker outlook for activity in the near term”.

Halifax, the country’s biggest mortgage lender, reported yesterday that house prices fell by 2.6 per cent last month, The drop left house prices down by a record 16.1 per cent over the past 12 months. Prices are falling twice as fast as in the early 1990s.

The Bank of England pinned much of the blame for the economy’s slide on the borrowing drought that high street banks have inflicted on consumers and businesses alike.

In a hint that it may take more radical steps to stimulate lending, it said that with banks hoarding cash, it was unlikely that normal lending “would be restored without further measures”.

After meeting bank chiefs, Alistair Darling added to pressure on them with a call for the rate cut to be fully passed on. Britain had been the first country to recapitalise its banks, he said, adding: “We now need to go further, to ensure those banks can resume lending to businesses, which is absolutely critical.”

The Chancellor said the Treasury remained ready to do “whatever we can” to help banks lend. He added: “It is absolutely essential that they help and treat their customers fairly.”

For homebuyers with tracker mortgages that follow base rates, the cuts since early November should have reduced the monthly cost of a £150,000 repayment mortgage by £210 to £711.

The Prime Minister said he hoped the combination of falling mortgage bills, lower petrol prices, and marked drops in the cost of gas and electricity expected next year would “help home-owners to feel more secure”.

However, the Bank’s warnings appeared to question the effectiveness of the Government’s £20 billion fiscal stimulus and could be seen as a hint that it might yield only limited benefits.

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