Many economists had been calling for a one percentage point reduction, but it was widely expected that the MPC would cut rates by just half a point.
So what has caused this big shift in strategy by the MPC?
It was only a few months ago that we were being warned that interest rates may have to rise because of high inflation, but in the past four weeks Bank rate has been slashed from 5% to 3%.
The reason for this about turn is the worsening state of the economy and growing fears that we are thundering towards a severe economic downturn that could last for years.
Latest figures from Halifax show that house prices are falling at their fastest rate for 25 years. Prices fell by 2.2% last month and over the past year they’ve dropped 13.7% taking the average house price back to October 2005 levels.
Separate data published earlier this week revealed that the service sector shrank for the sixth consecutive month last month, while manufacturing output fell for the seventh month running in September.
However, while the MPC’s decisive action has been welcomed by business and industry, there are fears that consumers will lose out.
We look at what this month’s one and a half point cut is likely to mean for borrowers and savers.
Falling interest rates should be good news for borrowers with variable rate mortgages and for millions of homeowners this month’s rate cut will lead to a reduction in their mortgage payments.
Around four million households have tracker mortgages which are directly linked to Bank rate. Consequently, they will benefit in full from the rate cut. Someone with a £150,000 repayment mortgage will see their monthly payments fall by £125 a month – knocking £1,500 a year off their mortgage costs.
However, those who are paying their lender’s standard variable rate (SVR), or who have discounted products which are linked to the SVR, may not be so fortunate.
It is feared that many institutions will not reduce the SVR by the full 1.5 points. Thirty two lenders have still not responded to last month’s rate cut and of the 57 that have, only 24 reduced have reduced their SVR by half a point.
HSBC has faced heavy criticism because it left its SVR unchanged following the October rate reduction and it has hinted that it may not reduce, or pass on the full reduction, this time around either.
Other major lenders that failed to reduce their SVRs by the full half point include Northern Rock and Abbey, both of which passed on just a 0.15 point reduction, Alliance & Leicester (A&L), which reduced its SVR by 0.25 points and Nationwide Building Society which passed on a 0.3 point cut.
Those looking for a new mortgage are also set to lose out despite the fact interest rates have fallen again.
We’ve seen a number of lenders re-price their tracker mortgages in recent weeks and the trend has been for the rates to go up, rather than fall. Abbey hiked the rates on its tracker deals by 0.5 percentage points earlier this week, while Northern Rock, A&L and Cheltenham & Gloucester have all pulled their trackers from the market. Analysts are warning that when they launch their new product ranges, the rates are likely to be higher than those they’re replacing.
Lenders argue they have no choice because wholesale funding costs haven’t fallen in line with the Bank rate reductions, but their actions have been widely criticised. One of the main reasons why house prices are falling so quickly has been attributed to the fact that mortgages are so hard to come by and the Government has called on banks and building societies to help alleviate the mortgage crisis by reducing rates and making home loans more widely available. With the opposite happening, and the mortgage impasse continuing, any improvement in the state of the housing market is unlikely any time soon and borrowers will continue to suffer.
This month’s rate cut is also bad news for savers as the rates on many accounts will plummet by the full 1.5 percentage points. And the majority will probably be paying less than inflation - the Consumer Price Index is running at 5.2% - which means the value of your money is effectively being eroded.
Savers must therefore seek out the highest possible returns for their money (while remembering that only the first £50,000 held with a single institution is protected under the terms of the Financial Services Compensation Scheme. If you have more than, spread your money around between different institutions).
Savings rates have been artificially high recently and the best deals are paying significantly more than Bank rate. The leading easy access accounts are paying more than 6%, and there are still a few fixed rate deals paying 7% or more. However, with Bank rate at 3%, such rates are unsustainable so savers need to be aware that providers will take this opportunity, not only to reduce savings rates but also to widen their profit margins.
Kevin Mountford, head of savings at moneysupermarket.com said: "Savers really need to be on their guard because most will probably feel the full brunt of the rate cut. That said, the ongoing shortage of funds for mortgages and loans on the wholesale markets means that providers will still be looking to attract money from retail savers to plug the funding gap. As such many will have one or two accounts that are paying rates much higher than the 3% Bank rate. These are the accounts you should be looking to move your money to."
If you have money you can afford to lock away, take advantage of one of the leading fixed rate deals as this will protect you against further rate cuts but don't hang around. fixed rate deals are being pulled left, right and centre so you need to act quickly.
Variable rates are also being cut. Click here to check out the leading deals.
For further information on what today’s rate cut means for borrowers and savers watch our video blog where our mortgage and savings experts, Louise Cuming and Kevin Mountford, give their analysis. Click here to watch our latest video 'Implications of the rate cut'.
And don’t miss this weekend’s Rate Alert email when we’ll be giving you a range of tips to help you cope with falling interest rates...
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.