The Bank of England (BoE) has made a shock interest rate reduction of -1.5% to 3%, the lowest level since 1955.

The size of the cut - the most dramatic since 1981 - signals the bank’s concern the UK is heading for a long recession. Mortgage lenders are now under pressure to pass the cut on to borrowers. However due to the unexpected size of the cut, most banks have not yet decided how much of it to pass on.

Liam Bailey, head of residential research at Knight Frank, said: “Today’s shock interest rate cut is clearly welcome news for the housing market. It is unlikely, however, that even a -1.5% cut will have any immediate effect on mortgage volumes or house prices.

“LIBOR remains stubbornly high as a result of the crisis in the banking system. As most banks fund mortgage borrowing through the wholesale markets, the rates available to homebuyers are unlikely to fall in the short-term. Of course, the Government’s bank rescue plan may eventually bring more liquidity to the system, but it will take some time for confidence to be restored.

“The lenders themselves will remain focused on their own financial health. They will remain highly risk-averse, demanding large deposits and only accepting the most secure applicants. This will only change when the banking system itself returns to normality, although it is unlikely that there will be a return to the mortgage market of a year or more ago.

“However, the Monetary Policy Committee (MPC) now seems convinced of the urgency of the situation. This much-needed cut, while having limited short-term effects, will bring the date of the ‘return to normality’ in the banking system closer, and with it a reversal in the fortunes of the housing market. A V-shaped, rather than L-shaped, recession seems more likely. However, we remain convinced that prices have further to fall before buyers – and mortgage applicants – return to the marketplace.”