INTEREST rates have been cut by 1.5% as the Bank of England takes drastic action to avert a deep recession.

The unexpectedly large cut brings official interest rates to 3% - the lowest level for more than 50 years - and was immediately welcomed by business leaders.

Richard Lambert, CBI Director-General, said: “This is a bold and welcome move by the Monetary Policy Committee, 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.”

The cut follows October’s 0.5% rate cut which was voted for unanimously by the Bank of England’s monetary policy committee (MPC).

Analysts were expecting at least a half-point cut with some organisations calling for a 1%. However there was little expectation that the MPC would take such a dramatic step as it has not previously cut rates by more than 0.5% in its 11 years since independence.

However the economic data in recent weeks has become increasingly stark. Since October’s rate cut, official figures have shown UK output shrinking by a worse-than-expected 0.5% between July and September – the first quarter of contraction since 1992.

The UK’s powerhouse services sector also shrank at its fastest pace for at least 12 years last month, while manufacturers saw a much bigger-than-expected fall in activity in September as the sector’s worst decline for nearly 28 years continued.

Those on tracker mortgages pegged to the Bank’s base rate should feel the full benefit of any cut.

Interest rates were previously held at 5% for six months by the MPC due to inflation fears but are now set to tumble as recession concerns take centre stage.

The cuts come despite the official measure of inflation standing at 5.2% – more than double the MPC’s official 2% target – underlining how much the worries over an economic slump have grown.

MPC “hawk” Tim Besley - who was voting for hikes as recently as August - has said rate cuts alone “will not be a magic bullet” and need to work in tandem with the bail-out of the banking sector announced last month.