The cost of borrowing is set to fall again after the Bank of England cut the base rate by half of one per cent to an historic low of one per cent.

Experts had expected the half point fall, although the Federation of Small Businesses had called for the rate to be held at 1.5 per cent.

The Bank of England’s Monetary Policy Committee decided to cut the rate because the global economy "is in the throes of a severe and synchronised downturn."

It said output in the advanced economies fell sharply in the fourth quarter of 2008, and growth in the emerging market economies appears to have slowed markedly.

"Business and household sentiment in many countries has deteriorated. The weakness of the global banking and financial system means that the supply of credit remains constrained."

It said that UK output dropped sharply in the fourth quarter of 2008 and business surveys pointed to a similar rate of decline in the early part of this year.

Credit conditions faced by companies and households had tightened further and the "underlying picture for consumer spending appears weak."

Businesses had cut production, scaled back investment plans and cut jobs.

The bank forecast that inflation would fall below the two per cent target by the second half of the year because of falling energy and food prices.

It said there was a substantial risk of undershooting the two per cent inflation target at the existing level.

"Accordingly, the Committee concluded that a further reduction in bank rate of 0.5 percentage points to one per cent was warranted this month."

This is the fifth cut in as many months and should offer the prospect of cheaper loans to homebuyers and businesses.

But it will mean another reduction for savers, with people like pensioners on fixed incomes facing even tougher times making ends meet.

US economics guru Nouriel Roubini called on central banks to cut rates to zero, claiming that the credit crunch would be severe even with zero interest rates.

But in spite of consensus estimates of a 50 basis point cut, the MPC may still be reluctant to make further cuts, given economy is already getting a big boost from past rate cuts and the precipitous fall in sterling.

The employers organisation CBI said the cut should support business confidence and provide a stimulus to the ailing economy.

Ian McCafferty, CBI Chief Economic Adviser said: "But at these very low levels of interest rates, and with the credit mechanism still impaired, it is vital that the Bank swiftly supplements today’s move with direct intervention in the corporate lending markets."

He added: "The real problem is not the price of credit, but its availability."

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