The Bank of England has cut interest rates by a quarter point to 5.25% leaving borrowers breathing a sigh of relief.

It is the second cut in three months as consumers increasingly struggle against tighter borrowing conditions following the credit crunch.

While most businesses and retailers welcomed the move, some were disappointed that the rate had not been reduced to 5%.

The Bank's Monetary Policy Committee (MPC) said due to the credit squeeze the UK is seeing slowing growth and a drop in consumer spending.

But the MPC said it has been faced with a difficult balancing act as soaring oil prices and higher energy bills could see inflation "sharply" rise in the coming months.

Halifax, Nationwide, Abbey and Royal Bank of Scotland/NatWest have all confirmed they will be passing on a 0.25% reduction in standard variable rates.

The move will reduce monthly repayments on a typical £100,000 mortgage by about £16 a month to £722.80, based on a new rate of 7.25%.

With E.ON becoming the latest to announce double digit increases in gas and electricity prices, the boost to households is much-needed.

But the Bank of England warned that inflationary pressures could see the Consumer Prices Index (CPI) rise further above its 2% target.

It said: "CPI inflation, at 2.1% in December, was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

The MPC said inflation pressures should ease later in the year and added there was even a risk that a sharp economic slowdown could pull inflation below target.

Investors on the London market took news of the quarter point cut badly, with many hoping for a cut of 0.5%.

The FTSE 100 Index plunged by more than 160 points after the decision.

The cut came in stark contrast to the US Federal Reserve's recent move to slash rates by 1.25% in less than two weeks in an attempt to stave off an economic recession.

Copyright © PA Business 2008