The Bank of England has voted to cut interest rates for the first time in more than two years.

The 0.25% decrease in the base rate to 5.5% is the first reduction since August 2005, and provides borrowers with some much-needed pre-Christmas cheer.

It comes as household finances have been squeezed in the past year by rocketing fuel bills and soaring prices at the petrol pumps.

The decision by the Bank's Monetary Policy Committee had rested on a knife-edge as its members were concerned that cutting rates too soon could push inflation above the 2% target.

But recent figures showing continued falls in house prices and a slump in consumer confidence appear to have persuaded it that now is the time to act.

And the credit crunch, which affected interbank lending rates, will also have put pressure on the MPC to cut the cost of borrowing.

The move will knock about £16 a month off the cost of a typical £100,000 mortgage if the cut is passed on in full by lenders.

Halifax has said it will reduce its standard variable mortgage rate to 7.5%, while Nationwide is cutting its SVR to 6.99%.

Other major high street lenders have also said their rates are under review following the base rate reduction.

However, the decision by the MPC will fuel concerns that the UK economy is heading for a sharp slowdown.

The Bank said in a statement: "Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow.

"Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November inflation report.

"But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead."

It added: "Although upside risks to inflation remain, which the committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term."

Copyright © PA Business 2007