Fears of recession gripping the world -- Bank of England cuts interest rates to 5.25%

The Bank of England has cut interest rates by a quarter point to 5.25 per cent despite calls for a half point cut.

The Bank's move will be welcomed by many mortgage borrowers, but homeowners who do not have a mortgage deal directly linked to the base rate may be disappointed as some lenders have been increasing their own rates in anticipation of a cut.

Michael Coogan, director general of the Council of Mortgage Lenders, said: "This is good news for the quarter of UK borrowers on tracker rates who will see an imminent reduction in rates. However, borrowers should not expect that a base rate reduction will automatically result in a cut in standard variable rates or discounted rates across the market.

"Lenders' rate setting policies are more complex than simply the level of the base rate. They are determined by a range of factors including the cost of retail funding and the cost and availability of wholesale funding."

Mortgage lenders called for another cut in the coming months.

Ben Thompson, of Legal & General Mortgages, said: "Today's rate cut was a dead cert but at least one more is needed this year to kick-start the mortgage market again. While council tax, utility bills and household costs have risen by more than a third in the past four years, the average family is £1300 worse off a year."

The widely expected quarter point cut by the Central Bank was modest compared to the recent cuts made by the Federal Reserve in the US which cut interest rates by a total of 1.25 percentage points in the last three weeks.

But while the Federal Reserve's central mandate is to ensure economic growth, UK rate-setters are focused on keeping inflation at 2 per cent, giving them much less room to move.

The decision by the Bank of England's Monetary Policy Committee comes as more evidence emerges of a slowdown in economic growth both in the UK and overseas.

Mervyn King, the Governor of the Bank of England, said recently that the current rate of 5.5 per cent is "bearing down on demand."

An important survey for Bank of England policymakers released several days ago showed that while Britain's service sector grew at a faster rate than expected in January, confidence among purchasing managers fell to its lowest level in six years.

Manufacturing growth in the UK also slowed to a two and half year low in January raising fears of a reduction in GDP, the measure of how much the economy is growing.

Retail sales were also weak in January.

Speaking in London last night, Alistair Darling sought to reassure consumers that the economic outlook was not too bleak, but he did admit that "The global economy is facing its biggest test in more than a decade."

But the Bank's hands were tied from making a more dramatic move by inflationary pressures.

Many families are being faced with higher energy bills after several of the major energy companies increased their tarriffs.

Mortgage bills are also higher for most families as the bank base rate is one percentage point higher than it was 18 months ago. Mortgage lenders are also increasing their rates in an effort to boost their profits in the wake of the credit crunch. On top of all that, council tax and water bills are also rising.

The Bank's MPC also had access to the latest inflation figures during its deliberations. These will not be released publicly until next week, but today's move indicates that they presented a challenge for the panel.