Interest rate slashed to 3%

The shock decision marks the biggest cut the bank has made since 1981.

It follows the news yesterday that annual food inflation fell by its largest amount in nearly three years in October.

Asda chief executive Andy Bond urged banks to pass the cut on to customers. "It should go some way towards restoring consumer confidence this side of Christmas," he said.

"With disposable incomes continuing to fall it is essential that banks and building societies pass on this saving to their customers. Everyone has to play their part and financial institutions are not exempt."

British Retail Consortium director-general Stephen Robertson said the "dramatic cut for Christmas could give customers the confidence to spend at what is many retailers’ most important time of the year”.

He added:“This is the kind of shock tactic that could get the economy’s heart beating again."

The consensus had been that the bank would cut rates by between 0.5 and one percentage point and some warned that a bigger cut may be viewed as a panic reaction as the country faces a technical recession.

Robertson added: “A cut on this scale puts the banks under more pressure to pass the benefits on to borrowers. Base rate reductions can’t achieve much if they don’t help household finances. It should also breathe life into lending between banks."