Homeowners also had reason to cheer the decision, as the rate cut could lead to cheaper mortgage payments.

The Bank pointed to slow economic growth here and abroad as a reason for the cut, and added that although underlying inflation is still above its 2.5% target, the level is expected to fall.

The cut is the first reduction in rates since February this year and marked a dramatic start for the Bank's new governor Mervyn King, who was chairing a Monetary Policy Committee (MPC) meeting for the first time.

Some analysts had expected the Bank to hold fire this month, possibly trimming rates in August instead.

Praise

Mervyn King won wide praise for overseeing a rate cut at his first MPC meeting as Bank governor.

It's interesting that Mervyn King has defied the market's name tag for him as 'unswerving Mervyn' - he's stamping his seal of authority on rate policy straight away David Brown, Bear Sterns

"The new governor has started on the right foot by presiding over today's decision to cut rates," said David Frost, director general of the British Chambers of Commerce.

"Now is a critical time for businesses. GDP growth is sluggish: the High Street spending boom is over and overseas demand is weak."

Ian McCafferty, chief economist at the CBI, agreed.

"This is the right decision. Inflationary pressures are well under control," he said.

And City analysts also welcomed the rate cut.

"It's a good move but it was a little bit overdue," said David Brown at Bear Sterns.

"It's interesting that Mervyn King has defied the market's name tag for him as 'unswerving Mervyn'.

"He's stamping his seal of authority on rate policy straight away."

Cheaper mortgages?

Some analysts had been against a rate cut, arguing that it would stimulate the housing market still further and increase the risk of a property crash.

I don't think it's going to be enough for people to say 'great, I'm going to go out and borrow more' Alex Bannister, Nationwide

The MPC's decision could see �12 a month knocked off the cost of a standard �80,000 mortgage if lenders pass on the full cut.

But housing experts denied the rate cut would trigger another housing boom.

"It's not going to have a huge positive impact on the housing market," said Alex Bannister at the Nationwide building society.

"The factors driving the slowdown are the weakness of the labour market and less speculative behaviour in the south east.

"I don't think it's going to be enough for people to say 'great, I'm going to go out and borrow more'."

'Hesitant' recovery

The UK economy grew at its slowest pace for 11 years during the first three months of the year, and growth has continued to be sluggish.

In a statement accompanying the rate cut, the Bank noted the global economic recovery had "remained hesitant" and that this had hit demand for UK exports.

Output growth had been "below trend" recently, the Bank said, and "slower consumer demand and subdued private investment have so far offset the impact of higher public spending".

The Bank is charged with keeping underlying inflation within one percentage point of 2.5%, and while it currently stands at 2.9%, the Bank said it expected the rate would fall in the coming months.

It noted that wage growth remained "muted" and said the strengthening of the pound in recent weeks would help to reduce inflation risks.

The weakening of the pound against other currencies earlier this year had raised fears that inflation could pick up.

A fall in value of sterling makes imports more expensive and so can push prices higher.