The Bank of England cut interest rates yesterday in the strongest sign yet that it is worried the UK economy could be heading for a sharp slowdown.
The pre-Christmas boost for borrowers sees the Bank's base rate fall by quarter of a percentage point to 5.5 per cent - the first reduction since August 2005. And mortgage lenders rushed to pass the cut on to hard-pressed homeowners.
Both Halifax and Nationwide said they would be implementing the 0.25 per cent reduction to borrowers from January 1. Halifax said it was reducing its standard variable mortgage rate to 7.5 per cent, while Nationwide is cutting its SVR to 6.99 per cent.
The move will knock about £16 a month off the cost of a typical £100,000 Halifax mortgage, reducing monthly repayments from £755.32 to £738.99. First-time buyers will see their monthly repayments fall by nearly £20 based on the average mortgage for people buying their first home of £120,000.
Calls for a cut intensified this week after evidence of crumbling confidence in the house market and retail sector. The decision of the Bank's nine-strong Monetary Policy Committee had been seen as too close to call, with members wary that cutting rates too early could push inflation beyond its two per cent target.
However, the credit crunch has returned in the last month, effectively tightening monetary policy after the rate at which banks lend to each other - known as Libor - soared. As well as five interest rate rises since August of last year, households are also faced with petrol costs of £1 a litre and higher food bills.
British Retail Consortium director general Kevin Hawkins said more cuts were needed if a recession was to be avoided in 2008.
"With customers under severe pressure it is only a first step to reviving consumer confidence and will make only a marginal difference to spending this side of Christmas.
"To soften the downturn that is clearly on the way for 2008 and avoid a full blown recession this must be the first of a series of cuts. The sooner the Bank delivers the next one the better."
Michael Coogan, director-general of the Council of Mortgage Lenders, said: "A reduction in interest rates is exactly what the market needs and will benefit consumers.
"This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year."