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The Bank of England yesterday cut interest rates to 1%, the lowest level in its 315-year history, as it sought to head off the worst economic crisis since the Great Depression.
The monetary policy committee made a statement accompanying the half percentage point reduction, saying its actions, combined with the government's tax cuts and the weaker pound, should provide a "considerable stimulus" to the UK economy.
But, in justifying its cut, the MPC also pointed to a "severe and synchronised downturn" in the world economy, as well as job cuts, and weakness in consumer spending and business investment.
It said the reduction in borrowing costs was needed to ensure that consumer price inflation, which is likely to fall below zero this year, returned towards the 2% target in the medium term.
But for now, it said, the economy was likely to decline every bit as fast in the early part of this year as it did in the fourth quarter of 2008, when it shrank by 1.5%, the biggest drop in nearly 30 years.
Last week the International Monetary Fund warned that Britain would be the worst hit major economy in what is expected to be the "deepest recession since the second world war". This outcome is what the Bank of England is trying desperately to head off.
The pound rose on the news of the rate cut, as dealers were heartened by the bank's action into thinking that the worst of the downturn may soon be over. Sterling rose to nearly $1.47 and over €1.14.
The stockmarket, however, was unmoved and finished flat.
The HSBC said it would match in full Threadneedle Street's move for almost all its customers, while the Nationwide said that it would cut its standard variable rate by half a percent.
But many lenders have yet to pass on last month's half-point base rate cut to borrowers on their standard variable rates, although they have been slashing their savings rates.
The shadow chancellor, George Osborne, said: "The fall in interest rates is welcome and necessary, given the increasingly bad economic news. However, it will inevitably hit hard millions of savers and pensioners, who are the innocent victims of Gordon Brown's recession."
Economists said the rate cut marked a prelude to what is known as "quantitative easing" whereby the central bank buys assets, such as corporate or government bonds, a move that has the effect of putting money back into the economy.
Mervyn King, the governor of the Bank of England, has been given the green light by the chancellor, Alistair Darling, to spend £50bn of taxpayers' money to buy up such assets in an effort to haul the economy out of recession and prevent deflation from taking hold.
Ian McCafferty, the CBI's chief economic adviser, said: "This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy.
"But at these very low levels of interest rates, and with the credit mechanism still impaired, it is vital that the Bank swiftly supplements today's move with direct intervention in the corporate lending markets."
There was further gloomy news about the economy yesterday as the Society of Motor Manufacturers and Traders announced that car sales were down 31% year-on-year in January.
"Sharply deteriorating car sales provide further clear evidence that consumers are very reluctant to spend, particularly on major costly items. This reinforces belief that consumers are likely to cut back markedly on their spending this year," said Howard Archer, economist at Global Insight.
Not all the economic news flow has been terrible over the past week or so - although most economists think it too early to be talking optimistically, as some government ministers have, of the "green shoots of recovery".
Yesterday's report from the Halifax that house prices had risen in January for the first time in a year brought hope that the worst of the house price declines could be over.
But the Halifax itself warned that the rise was likely to be a statistical blip, as the market remained under severe downward pressure. Last week, the Nationwide reported that house prices had fallen by 1.3% over the same period.
However, the purchasing managers' indices for the manufacturing, services and construction sectors, all released this week, were slightly less weak in January than in December, although they still showed that the economy was shrinking rapidly - just slightly less rapidly than before.
There are also indications from some estate agents that inquiries from potential buyers are picking up in response to lower house prices, although first-time buyers are still struggling to find a mortgage and the number of new mortgages being approved is still at a very low level.
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