The move has been welcomed by many commentators who believe the cut will help the slowing economy.

Hetal Mehta, from the Ernst & Young Item Club, describes the cut as the "right medicine at the right time".

The Confederation of British Industry (CBI) said it was now up to the banks to pass on the reduction to their customers.

Although this may be good new for borrowers, banks are likely to lower the rates currently paid on savings accounts.

The Royal Bank of Scotland and Lloyds TSB were the first to react, by saying they will be passing on the cut in full to small business customers, while Lloyds also agreed to do the same for its mortgage customers.

A number of other lenders have now followed suit as announcements from banks continue to be made public.

Before the rate cut was announced, the Halifax said its customers with existing tracker mortgages would benefit in full from any cuts, following the clause in Halifax's contract which could have allowed it to apply a limit to the cuts it passed on to mortgage customers.

Although this months cut was not as much of a shock as November's, it is still a significant sign that the economy has been hit hard and economists are hoping this will restore confidence in spending.

November saw further damage to the property market, as house prices fell by 2.6% according to the Halifax - the biggest monthly fall since the housing market crashed in the 1990s.

According to the Society of Motor Manufacturers and Traders (SMMT), the amount of new cars sold in November fell by 36.8% compared to last year, the most significant drop in nearly 30 years.

The UK's largest mortgage lender The Halifax said the cost of the average property in the UK now stood at £163,605, almost £31,500 lower than a year ago.

Graeme Leach of the Institute of Directors was happy with the Bank's decision, saying it was "bold but necessary".

The CBI said it wanted to see lending by banks improve, to keep businesses working.