Bank of England Slashes Rate to 57-Year Low of 2%

The Bank of England slashed interest rates by a full percentage point on Thursday to shore up Britain's crumbling economy and head off the threat of deflation.

The cut took rates to 2.0 percent, their lowest level since 1951.

UK interest rates have never gone below this level since the central bank was created in 1694.

Analysts had widely expected the move following business indicators suggesting the economy could be heading for an even deeper recession than most people had so far predicted.

But the pound rose and short sterling futures fell as some investors had been betting on a bigger cut, particularly after Sweden's central bank slashed rates by 1.75 percentage points earlier in the day.

"Across the UK, deteriorating house prices and rising unemployment are both taking their toll on business and consumer confidence," said Trevor Williams, chief economist, Lloyds TSB Corporate Markets. "All of this, combined with the prospect of sharp falls in inflation, means that today's cut was fully justified."

In a statement, the BoE made clear that the downturn had gathered pace and conditions in credit markets remained difficult.

Amid a global credit crunch banks have clamped down on lending, hitting Britain's highly-indebted economy hard.

House prices have fallen 18 percent from last year's peak, unemployment is soaring and consumer confidence has taken a dive.

Britain's economy shrank in the third quarter for the first time since the recession of the early 1990s and analysts expect the pain to intensify into next year.

"The Monetary Policy Committee's cut of one percentage point is another 'giant leap' lower in the base rate but just a 'small step' in the right direction for the economy in the near-term," said Sam Hill, fixed income fund manager at Threadneedle.

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