The Bank of England yesterday made a bigger than expected cut in Britain's interest rates, saying it was worried that the slowdown in the world economy could be deeper and longer than it had previously thought.

The Bank's monetary policy committee (MPC) announced after its regular monthly meeting it had reduced its key repo rate by half a percentage point - its biggest move in nearly three years and the seventh rate cut this year - to just 4 per cent, a fresh 37-year low. "Evidence on the outlook now suggests that the global slowdown may be somewhat deeper and longer than previously thought," the MPC said in a statement.

Financial markets, which had expected just a quarter point cut from the MPC given that the British economy is still in relatively good shape, reacted positively, with stocks, the pound and gilts all gaining ground on the perception the MPC was taking decisive action.

Industry, which is desperate for lower borrowing costs to ease its battered balance sheets, was swift to welcome the move too.

Britain recorded a healthy 0.6 per cent economic growth rate in the third quarter and is on course to be the best performer within the Group of Seven industrialised nations this year. But a swathe of recent data have highlighted the fact that Britain is not isolated from ill economic winds sweeping the world.

Many economists believe the Bank may deliver a further quarter point cut in coming months, taking the key benchmark rate below 4.0 per cent for the first time since 1955.

They say the Bank is well placed to cut rates because inflation is very subdued.

Most British banks announced they were passing on the half-point cut to customers.