The cost of borrowing should come down after the Bank of England cut interest rates to two per cent, the lowest figure for nearly 70 years.

The Bank of England’s Monetary Policy Committee cut the official Bank Rate paid on commercial bank reserves by one percentage point on Thursday.

It follows a 1.5 per cent cut last month. The seriousness of the economic downturn is underlined by an unprecedented 3.5 per cent fall in two months.

The gauntlet has now been thrown to banks to pass on lending cuts to borrowers. However, the cut will be bad news for savers facing diminishing income from their investments.

The MPC said business surveys had weakened further and suggested that the downturn has gathered pace.

Consumer spending and business investment have stalled, while residential investment has continued to fall.

It added that despite measures to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remained extremely difficult.

The committee said it was unlikely that a normal volume of lending would be restored without further measures.

Inflation fell to 4.5 per cent in October and other cost pressures have eased, including the falling price of petrol and diesel, and lower food prices.

The temporary 2.5 per cent cut in Vat should also reduce inflationary pressures in coming months.

The MPC said there was a substantial risk of undershooting the two per cent inflation target and decided that a one per cent cust was "necessary in order to meet the target in the medium term".