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Bank of England reduces interest rate to 2pc

The Bank of England has reduced interest rates to an all-time record low of 2 per cent.

The Monetary Policy Committee announced its decision today after two days of deliberations amid worsening economic news.

It surprised markets last month by slashing the base rate by 1.5 per cent to 3 per cent.

A statement from the Bank of England said: “Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult.

“The Committee noted that it was unlikely that a normal volume of lending would be restored without further measures.”

Figures yesterday on the beleaguered services industry showed activity in the sector shrank at its fastest pace for 12 years in November.

Employment, new orders and current activity were all at record lows, according to the latest survey report from the Chartered Institute of Purchasing and Supply.

Manufacturing and construction data earlier this week also showed record lows for activity last month as the economic crisis deepens.

And the MPC's tone has turned markedly dovish in recent weeks, with minutes for November's meeting showing that the committee even considered slashing rates by 2 per cent.

It decided to hold off from this measure while it waited to see what fiscal stimulus the Chancellor would unveil in the Pre-Budget Report.

The MPC will have to consider if the 2.5 per cent cut in VAT and other measures outlined by Alistair Darling will be enough to encourage consumers to shop and boost the flagging economy.

However, Bank governor Mervyn King admitted last week that the cut may not start to have any significant impact on spending until later next year.

Business body the CBI said it was critical that any cuts would be passed on by banks to consumers and businesses.

CBI deputy director-general John Cridland said: "The CBI believes that the Bank will need to cut interest rates by 1.5 per cent during the winter months.

"What is critical for business and consumers alike is that the reductions are passed on. Tomorrow's cut will need to be at least half a point but more important than the size of the cut will be its effectiveness."