Bank cuts interest rates by 0.25%

The cost of borrowing in the UK fell to its lowest level since 1964 today as the Bank of England cut rates by a quarter-point to 4.5% in a bid to restore confidence after the September 11 terrorist attacks on the US.

The Bank said that consumption in the first half of the year had been growing faster than previously thought, but added: "Looking ahead, the consequences of the terrorist attacks for the UK and the world economy are still unclear. Early indications are that the direct impact on the UK economy will be less severe than in the United States. But the weaker world outlook and increased uncertainty have set back UK business and consumer confidence, and may, for a time, restrain business and household spending."

Despite the cut, MSF, the union for skilled and professional people, condemned the Bank for failing to act more aggressively.

The MSF general secretary, Roger Lyons said: "Leaving the UK rate 50% higher than the US represents not caution, but cowardice in the face of crisis."

Ian Fletcher, chief economist of the British Chambers of Commerce, also accused the Bank of timidity. "Under normal circumstances we would welcome a quarter point cut. But these are not normal circumstances, and with inflation well under control the Bank has the scope to act more decisively and more boldly in cutting interest rates."

Lower rates will be a fresh boost to borrowers but they will bring little consolation for savers, who have seen their returns dive this year as interest rates tumble across the globe in response to a slowing world economy.

The US Federal Reserve has led the campaign for lower rates and this week slashed its key lending rate by a half-point to 2.5% - the lowest cost of borrowing in 39 years.

The rate for the 12-member eurozone, which takes almost 60% of Britain's exports, is 3.75%, so even with today's cut, Britain still has the highest rates in the G7 group of leading industrialised countries.

Industry and unions have been urging the Bank of England to cut rates aggressively in the face of a manufacturing recession that has brought tens of thousands of redundancies.

Services are also feeling the effects of a slowdown. Consignia, the postal services group, yesterday said it wanted to cut costs by ?1.2bn, which could lead to as many as 20,000 job cuts.

Yesterday, economic data showed activity dropping at its fastest rate since December 1998. Order books were down across all types of companies, according to the Chartered Institute of Purchasing and Supply. Transport, hotel and restaurant sectors were particularly affected, the institute said.

The institute's overall activity index fell to 48.1 from 50.9 the previous month, the first time it has slipped below the critical 50 break-even level since February 1999.

In a further sign that the economy is slowing, house price rises ground to a halt in September, according to the Halifax bank. But consumer spending remains robust, according to the Confederation of British Industry, which said high street sales have grown at their fastest pace for five years in September.

Strong consumer spending has forced the Bank to adopt a cautious stance on rates.

Britain may need lower interest rates but inflation edged up to 2.6% in August - just above a government target of 2.5%. Today's cut was the sixth reduction this year and the second since the attacks on the US. The Bank's September 18 cut came after an unprecedented meeting of its monetary policy committee between its normal monthly meetings.