The Bank's rate-setting Monetary Policy Committee (MPC) announced its decision at midday after two days of deliberations amid worsening economic news.

The news - taking rates to their lowest level since the Bank was founded in 1694 - was immediately welcomed by business leaders in Leeds.

However Ian Williams, policy director at Leeds, York & North Yorkshire Chamber of Commerce, said: "Just reducing interest rates is not enough.

"Government needs to ensure that the measures announced in the Chancellor's Pre Budget Report are quickly filtered through to business with minimal bureaucracy. In addition, a priority remains to monitor and push the banks to resume normal lending."

He added: "Having cut interest rates today, we urge the Bank of England to continue to closely monitor the economy and not be afraid to take further action to stimulate business in the future."

Significant

Bank governor Mervyn King admitted last week that previous cuts may not start to have any significant impact on spending until later next year.

Meanwhile borrowers with variable rate mortgages were warned they are unlikely to see the full benefit of today's cut as many lenders are not expected to pass on the full reduction to standard variable rate (SVR) customers.

At the same time, up to 1.2m homeowners with tracker mortgages, which should automatically move up and down in line with the base rate, are unlikely to benefit from the full cut due to the terms of their deal.

If today's cut was to be passed on in full, people with a £250,000 home loan would save £142 a month.

Britain's biggest mortgage lender, however, said it would pass on all future interest rate cuts to its existing tracker customers.

Halifax said it would not exercise an option in its tracker deals not to pass on all or any reduction once the base rate fell below three per cent.

The move follows speculation that City watchdog the Financial Services Authority could force the group to pass on the cut as borrowers had not been made aware of the clause when they took out their mortgage.

There had been calls in Leeds for an even bigger cut of 1.5 per cent to just 1.5 per cent.

Ron McMillan, northern chairman of accountants PricewaterhouseCoopers, said: "This is no time for half measures. We saw no reason for the MPC to delay making a further one and a half percentage point cut in base rates in order to mitigate the risks of the recession turning into a full-blown depression."