Interest rates were slashed by another percentage point yesterday, bringing the official cost of borrowing down to 2%, equal to the lowest rate since the Bank of England was founded in 1694.

The sudden and brutal deterioration in the economic outlook across Europe also prompted the European Central Bank to cut its main policy rate by three-quarters of a percentage point to 2.5% – its largest reduction ever – just hours after Sweden’s central bank cut the country’s official borrowing costs by a record 175 basis points.

Sterling fell to $1.45 ahead of the Bank of England announcement, but recovered to end the day at $1.476, down less than a cent, amid signs of further pressure on the currency.

Even though none of the European central banks gave any encouragement to traders betting on further rate cuts, financial markets expect UK rates to fall to 1 per cent in the months to come and another 0.5 percentage point reduction in the eurozone by February. The last time the UK had a rate of 2% was 1951.

Financial Times