THE cost of borrowing for homeowners and businesses was cut yesterday for the first time in two years as the Bank of England moved to shore up weak consumer spending and bolster a faltering economy.

In a move widely predicted by the City and immediately hailed by business leaders, the Bank’s nine-member Monetary Policy Committee (MPC) cut interest rates by a quarter of a point, to 4.5 per cent.

The Bank’s verdict came after recent official figures showed the economy cooling rapidly, with growth in the second quarter of the year dropping to its weakest in 12 years.

The decision, after the 100th meeting of the MPC since it was handed control of rates in 1997, will be a fillip for homebuyers, knocking £15 off the cost of an average £100,000 mortgage for those on variable rate deals.

Many of the biggest lenders moved quickly to pass on the benefits to mortgage customers, with Halifax and HSBC among those to announce that they would knock a quarter of a percentage point off their standard rates from next month. But the Bank also dampened expectations that further cuts in the cost of borrowing are a “done deal”.

In its statement the MPC said that action was needed to tackle “subdued” growth after household spending and investment by business slowed during the first half of the year. Despite soaring oil prices, this meant that inflationary pressures would ease, creating room for lower rates.

While there were also signs of a recent pick-up in consumer spending, the Bank gave warning of lingering risks that this could slide further in the short term. It made no mention of any economic repercussions of the recent terrorist bombings in London. But in comments that some in the City took as an attempt to quell speculation about further rate reductions, the Bank also said that rising share prices and a recent fall in the pound should boost future growth.

The FTSE 100 index of leading shares is up by more than a fifth over the past year and by almost 10 per cent in the past three months alone. The pound’s overall value is down by about 4 per cent from its level a year ago.

Next week’s quarterly Inflation Report from the Bank will set out in detail its latest thinking on the state of the economy and the outlook for interest rates. The widespread expectation is that the nine MPC members, led by Mervyn King, the Bank’s Governor, unanimously backed yesterday’s rate cut, after a 5-to-4 split in their July vote to hold base rates.

But economists were divided yesterday over how far the cost of borrowing might fall. Some believed that there could be two more rate cuts this year with more to come in 2006. But a significant number think that in an unusually short downward “cycle” rates will bottom out again after just one further reduction.

Roger Bootle, an economic adviser to Deloitte, the accounting group, said: “I think rates will be at 4 per cent by Christmas and that they will fall all the way to 3.5 per cent by the middle of next year.

“But given that 3.5 per cent was the trough of the last cycle, when the consumer and housing markets were strong, it is plausible that rates will go even lower.”

Employers and business groups applauded the Bank’s decision in the meantime. “This cut will be a catalyst for growth and will provide an essential boost to consumer and business confidence,” Sir Digby Jones, the DirectorGeneral of the CBI, said.

MORTGAGES ON THE WAY DOWN

The following mortgage lenders have announced plans to pass on the Bank of England’s quarter-point cut in interest rates by reducing their standard variable rates:

First Direct cut its rate to 5.5 per cent yesterday

Halifax, the biggest lender, will cut its rate to 6.5 per cent on September 1

HSBC will cut its rate to 5.5 per cent on September 5

Northern Rock’s rate will be 6.59 per cent from September 1

Lloyds TSB and Cheltenham and Gloucester will cut their rates to 6.5 per cent on September 1

Sainsbury’s Bank and Intelligent Finance will both cut their rates to 5.7 per cent in September

• Those who said that their interest rates were still under review included Nationwide, the second-biggest lender, Abbey, Royal Bank of Scotland and Alliance & Leicester

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