Bank cuts rate to lowest since 1977

The Bank of England reduced the cost of borrowing yesterday to its lowest level since 1977, as concern over the strong pound forced the seventh cut in interest rates since the autumn.

Industry welcomed the surprise quarter-point fall in the base rate to 5%, saying that the move would help to fill order books and boost output in the depressed manufacturing sector.

However, there was less good news for Britain's 10m mortgage payers, with the Halifax - the UK's biggest lender - announcing that it would not cut the cost of home loans, and its main rival, the Abbey National, reducing them by just 0.1 percentage points. Virgin Direct was the only lender to cut mortgage rates by the full 0.25 points.

The Bank of England has a mandate to hit the government's 2.5% inflation target, and in a statement announcing yesterday's move said that a failure to cut rates would have made an undershoot likely.

Its nine-strong monetary policy committee has been expecting sterling to fall on the foreign exchanges, thereby increasing the cost of imported goods. However, the pound's unexpected resilience left it with no choice but to ease policy.

Gordon Brown, the chancellor, said in his annual Mansion House speech last night that the government's tough anti-inflation measures on coming to office were the reason for the continuing fall in borrowing costs.

"In contrast to the 80s and 90s, monetary policy has been able to respond positively at the right time and has thus been able to make its contribution to stability and growth", he said.