But this is only part of a major stimulus package announced today by the bank to prevent growth in the UK economy from grinding to a halt over the next 18 months.
The Bank’s monetary policy committee (MPC) voted unanimously for the reduction in interest rates to 0.25 per cent.
They also voted by in majority decisions for a substantial extension of quantitative easing.
MPC members voted by 8 to 1 for up to £10 billion of Corporate Bond purchases and by 6 to 3 for an extension of the total stock of debt to £435 billion.
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The extension of quantitative easing will take the total stock of government debt held by the Bank from £375bn to £435bn and add another £10bn of private sector debt onto its balance sheet.
MPC also said that there is a possibility of interest rates falling even lower before the end of the year, to just above zero. However, there was no suggestion that the absurd idea of negative interest rates - used for some rates by the ECB and some continental banks - might be adopted in Britain.
Summary of Bank of England package
- Interest rates cut to 0.25 per cent - their lowest ever level in the Bank’s 322-year history
- Another £60bn of government bond purchases - taking the total stock to £435bn
- A new £10bn corporate-bond buying package, similar to the programme being undertaken by the European Central Bank (ECB)
- £100bn of cheap loans for banks to stimulate lending
The Bank said: “Following the UK’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short-to-medium term has weakened markedly.
“Confidence and optimism suggest that the UK is likely to see little growth in GDP in second half of the year.
“The package contains a number of mutually reinforcing elements, all of which have scope for further action. The MPC can act further along each of the dimensions of the package by lowering bank rate … and by expanding the scale or variety of asset purchases.”
The Bank said even with the largest stimulus package since the recession it expects the UK economy to freeze during the rest of the year, as it lowered growth forecasts in the biggest single downgrade since it started publishing projections back in 1992. In new post-referendum forecasts published in the latest Inflation Report, the Bank now predicts the UK economy will grow by just 0.8 per cent next year, down from its pre-vote forecast of 2.3 per cent.
In total, number crunchers at the Bank believe the UK economy will be 2.5 per cent smaller by 2018 than it would have been had the UK stayed in the EU - a £45bn hit to GDP.
To super-charge the impact of the interest rate cut, and provide some welcome reprieve for the banking sector, a new system of cheap loans - a so-called Term Funding Scheme (TFS) - for banks was also unveiled. The TFS will allow banks to borrow directly from the Old Lady with the Bank prepared to print another £100bn of new cash to finance the scheme.
Announcing these measures bank governor Mark Carney said:
“Had it not taken the action announced today, the MPC judges it likely that output would be lower, unemployment higher and slack greater.”
In a letter to Chancellor Philip Hammond where Carney stressed monetary policy would not be enough to protect the UK economy, he added:
“The UK is a highly flexible, dynamic economy. These characteristics will help it move to a new equilibrium as its future relationship with the EU becomes clear and new opportunities with the world open up.”
The Chancellor responded that he was “prepared to take any necessary steps to support the economy and promote confidence.”
The decision marks the first cut to interest rates since March 2009. Carney added the MPC was willing to take rates as close as they could go to zero in the fight to protect the UK economy.
Minutes from the MPC meeting said: "If the incoming data provide broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in bank rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year. The MPC currently judges this bound to be close to, but a little above, zero."