The cut gave a brief boost to UK and European stocks but gains quickly faded [AFP]

The cut far exceeded expectations and underlined the gravity with which economic leaders view a crisis that began with a slump in the US housing market and has now enveloped the world economy.

In a statement the bank said: "The past two months have seen a substantial downward shift in the prospects for inflation in the United Kingdom.

"There has been a very marked deterioration in the outlook for economic activity at home and abroad. Moreover, commodity prices have fallen sharply."

It is the largest cut since a two percentage point reduction in 1981.

David Buick, a partner with the BGC brokerage firm in London, said: "I think this a snappy and really smart move. It's imaginative by anyone's standards."

Last month, the Bank of England joined forces with the US Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates. Politicians in the 15-country euro zone hope a rate cut from the ECB will help stave off recession and limit unemployment.
  
Rate cuts, however, may help less than in the past.
  
Banks infected by a collapse of confidence within the financial system are still wary of extending loans and are reluctant to pass cuts on to borrowers. But the sheer scale of Thursday's cut will put pressure on banks to conform and back smaller businesses, some facing bankruptcy.
  
The Swiss national bank cut its rates by 50 basis points.

Markets down

World stocks markets remained well down on Thursday, with Wall Street also set for a weaker start.

The scale of the Bank of England cut gave a brief boost to UK and European stocks but gains quickly faded as fears grew that such dramatic action suggested the UK economy may be in even more trouble than previously thought.

Sterling gyrated but it was down on the day against the dollar.

Reductions in European rates come against a backdrop of further data highlighting the scale of a slowdown in the global economy.

German manufacturing orders suffered the biggest fall since reunification in 1990 in September while UK house prices fell at their sharpest rate in at least 25 years in October.

The FTSEurofirst 300 index of European shares briefly bounced off lows, only to fall back lower again to stand down 3.1 per cent in afternoon trading.

Britain's FTSE 100 stock index was down 3.5 per cent.

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