In an unexpected move the Bank of England's monetary policy committee (MPC) has reduced its base interest rate by 1.5 percentage points to 3 per cent.

This marks the lowest interest rate since 1955, and comes on the back of continued worry over a potentially deep recession in Britain. The Bank noted a "substantial downward shift" recently in the inflation outlook; this makes a serious rate cut more palatable, as fears over easier availability of money stoking price rises are reduced.

The consumer prices index (CPI) measure of inflation rose from 4.7 per cent in August to 5.2 per cent in September. It is this index that the MPC is charged with keeping at or close to 2 per cent.

However, by drastically cutting its base rate the Bank is signalling both that it believes inflation will come down of its own accord – in part due to falling oil prices and dwindling consumer demand – but also that reflationary measures are now a higher priority.

Business has welcomed the move, with John Wright, national chairman of the Federation of Small Businesses, saying: "We called for a bold 1 per cent cut and this unexpectedly large rate cut will make an enormous difference to small firms and will put money in people's pockets before Christmas.

"But all this will come to nothing if the banks do not follow through and pass on the rate cuts to those small firms struggling with increased costs of credit."

Prime Minister Gordon Brown has called for mortgage lenders to pass on rate cuts in full, as some companies have been resistant to do so, preferring to use the breathing space to try and underpin their funding problems.

The minutes of the MPC meeting, which reveal the details of the discussion and voting, will be published on November 19.