Bank rate has been reduced from 5% to 4.5% - its lowest rate for more than two years. The decision to cut rates earlier than expected has been taken as the Bank of England and the Government try to instil some stability to the market.
Banking shares plummeted yesterday and the Chancellor, Alistair Darling, announced a rescue package this morning designed to shore up the fragile financial sector.
The tide has turned significantly in recent weeks. When the bank of England's Monetary Policy Committee (MPC) met last month we were warned that inflation was still on the up and consequently interest rate reductions in the near future were unlikely. The Consumer Price Index is currently running at 4.7% - way above the 2% target - and it is expected to hit 5% this month following recent increases in energy bills.
However, since then we have seen a rapid deterioration in the state of the economy as the severity of the financial crisis worsens. The MPC clearly now sees the battle to avoid an economic recession as more important than the fight against inflation - and it was obviously decided that decisive action is needed if a global economic meltdown is to be avoided.
Further interest rate reductions are expected, with some economists forecasting Bank rate at 3.25% by the end of next year.
This is obviously great news for borrowers with tracker rate mortgages as they are guaranteed to benefit in full from any rate reductions. This month's half-point cut will save someone with a £150,000 interest-only mortgage £62.50 a month - £750 a year.
Those with discounted mortgages should also hopefully benefit from the rate cut, although because their rate is linked to a standard variable rate, any change is at the lender's discretion.
But the big question is what it will mean for rates for new customers. Many lenders have hiked their mortgage rates in recent weeks because of the nervousness in the financial markets and the fact institutions aren't willing to lend to one another. This has pushed wholesale borrowing costs higher, which in turn is being passed on to the consumer.
If Bank rate had only been cut by a quarter-point this month, many analysts feared there would be little impact on wholesale rates. However, the decision to cut Bank rate by 0.5 points is a significant move, and it is hoped that rates will begin to drop again.
A half-point cut would ordinarily be bad news for savers but we are in anything but ordinary times. Traditionally savings and mortgage rates have been linked to bank rate but this relationship is becoming increasingly divorced because of the impact of the financial crisis. As a result, savings rates are expected to remain highly competitive.
Institutions are still desperate to attract money from retail savers to shore up their capital reserves. However, this doesn't mean all savers can rest on their laurels. Most providers have acquisition products which are priced to attract new customers - those rates will remain competitive. But providers are likely to cut rates on other deals, so if you have money that's been in the same account for some time, look to move your money to a better paying deal.
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