Business leaders and unions immediately welcomed the "very bold" move to cut rates by 1.5% although one group warned the Bank not to use up all its "bullets" too soon.

David Kern, economic adviser to the British Chambers of Commerce, said: "We support the MPC's decision to cut rates by more than analysts expected. But we believe the MPC should move much more steadily and deliberately and avoid too many lurches towards emergency measures.

"Emergency measures have the undesirable affect of unsettling the markets and undermine confidence. Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens."

Adam Lent, the TUC's head of economics said it was the "right call", adding: "It shows the Bank now understands that the problem is recession not inflation. This cut was precisely in line with the TUC's call.

"But the real challenge is to ensure that these cuts are passed on to both business and mortgage customers. Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving again.

"Unless the cost of credit comes down, there will be many avoidable job losses in sound businesses."

Graeme Leach, chief economist at the Institute of Directors said: "This is a bold and aggressive move by the MPC and just what the economy needs. The household savings ratio is close to zero and could spike upwards, business investment intentions have fallen off a cliff and the banks are unlikely to pass on the reduction in full.

"The reduction shows that the MPC think inflation is yesterday's story and deflation is the risk for tomorrow. We think interest rates could touch record lows of 2% or less by this time next year. The sooner we get interest rates down, the less is the risk of a long and deep recession."

CBI director general Richard Lambert said: "This is a bold and welcome move and achieves what the CBI had been calling for.

"Business and consumer confidence has been deteriorating sharply in recent months, and recession has replaced inflation as the major threat to the economy over the next year or two.

"This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers."

Federation of Small Businesses chairman John Wright also welcomed the cut, saying: "We called for a bold 1% cut and this unexpectedly large rate cut will make an enormous difference to small firms and will put money in people's pockets before Christmas. The cut amounts to a generous saving for small firms of £750 million on loans and overdrafts.

"But all this will come to nothing if the banks do not follow through and pass on the rate cuts to those small firms struggling with increased costs of credit."