The Bank of England's monetary policy committee (MPC) has reduced the base rate of interest by 0.5 percentage points in a special meeting today.

The move comes after the Treasury announced a £50 billion bail-out plan, intended to shore up banks struggling to borrow money after inter-bank lending collapsed. The move offers £25 billion to eight major financial institutions on the condition they raise £25 billion in new capital themselves, as well as a further £25 billion fund for other firms.

Following the surprise interest rate move from the Bank of England, which some commentators had previously suggested could be needed to restore consumer confidence and stimulate the economy as it enters recession, a joint statement was issued from seven national banks.

"Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

"Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions."

The UK bank rate has been unchanged since a quarter point cut in April, as increasing inflation had raised concerns over the MPC's ability to cut lending costs to stimulate economic activity.

However, while accepting that the consumer prices index (CPI) measure of inflation is set to rise above five per cent within the next two months, the Bank of England expects it to drop noticeably thereafter.

The MPC also added that cuts in interest rates "could not be expected to resolve the current problems in financial markets", noting that more capital is needed to liquidate financial markets, as the Treasury announcement this morning hopes to achieve.

The Bank of England also restated its commitment to meeting the Government's two per cent target for CPI inflation, noting that it believes this is achievable "in the medium term".