A realisation of the depth of the slump, yesterday drove the Bank of England to make a panic 1.5% cut in interest rates to 3%, its lowest since 1955.
Up till now the B of E position has been that it was there to defend the currency and the economy against the rise of inflation.
This position was thrown into the bin yesterday.
Last month it cut rates from 5% to 4.5% in an emergency move co-ordinated with other central banks.
Yesterday the European Central Bank lowered its eurozone interest rates again, from 3.75% to 3.25%.
The reaction of the FTSE 100 index was a 5/7% fall, to close down 258 points at 4272 points, lopping £62 billion off share prices.
There had been widespread calls from UK industry for a major rate cut from the Bank of England and yesterday’s is the most dramatic cut since a 2% reduction in 1981.
The Bank’s Monetary Policy Committee (MPC) unveiled its decision after new figures out yesterday showed house prices have fallen by 15% in the past year.
It was also revealed that car sales plummeted by over 23% last month.
The Bank said in a statement: ‘The past two months have seen a substantial downward shift in the prospects for inflation in the United Kingdom.
‘There has been a very marked deterioration in the outlook for economic activity at home and abroad. Moreover, commodity prices have fallen sharply.
‘Since mid-September, the global banking system has experienced its most serious disruption for almost a century.
‘While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time.’
The TUC welcomed the 1.5% cut in interest rates.
TUC Head of Economics Adam Lent said: ‘This is the right call. It shows the Bank now understands that the problem is recession not inflation.
‘This cut was precisely in line with the TUC’s call.
‘But the real challenge is to ensure that these cuts are passed on to both business and mortgage customers.
‘Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving again.
‘Unless the cost of credit comes down, there will be many avoidable job losses in sound businesses.’
TUC senior policy officer Nicola Smith said the banks should pass on the cut in rates to their customers.
Asked what should happen if they did not, she said the government should assist businesses just as it was assisting banks.
Richard Lambert, CBI director-general said the cut was ‘a bold and welcome move’ and ‘should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers’.
Treasury Secretary Yvette Cooper called on banks to ‘do their bit’ and pass the rate cut on.
Nationwide said it will pass the rate cut on in full from December 1 and Lloyds TSB said its mortgage arm Cheltenham and Gloucester would do the same.
Barclays, HSBC and Royal Bank of Scotland said they are reviewing whether to pass on the rate cut.
l The Unite union yesterday condemned Lloyds TSB for announcing 59 redundancies at the company’s insurance group, based in Newport, Wales.
Steve Pantak, Unite regional officer said: ‘This is highly premature and totally unacceptable. Lloyds must reconsider its position even at this late stage and guarantee no compulsory redundancies.
‘We strongly believe that any cost savings can be met with natural wastage and voluntary means.
‘This is a bad omen of what is to come when Lloyds TSB merges with HBOS.’
There have been warnings that the 1.5% cut will touch off a run on the pound sterling.