Central banks in Europe, America and the UK have all cut rates by 0.5 percent.
The Bank of England announced a 0.5 percent interest rate cut at midday today.
In a concerted action by the world's central banks to break the grip of the credit crunch, rates have been slashed across the board, with the US Federal Reserve and the European Central Bank also cutting their rates by 0.5 percent.
It is hoped that banks will pass on these reductions to consumers. This would leave people with more money in their pockets, hopefully allowing them to spend more and keep the economy growing.
More directly, cuts to mortgage rates would also alleviate the repayments burden on many homeowners - and would help to arrest the ongoing housing market downturn.
The rate cut comes hard on the heels of the announcement of the government's plan to buy up shares in eight large financial firms, which was announced this morning.
As late as last week, the consensus among economists was that the Bank would either leave rates as they were or cut by just 0.25 percent. However, the recent dramatic worsening of the credit crunch has led the global banks to work together and attempt to boost confidence.
The FTSE has risen strongly on the news, trading up on yesterday after dropping by over seven percent earlier in the day.
In a statement, the Bank of England described its decision to reduce the rate as "necessary".
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