The Bank of England has cut its key interest rate 0.25% to 5.5% but the European central Bank left its key rate steady at 4% after meetings finished overnight.
The central bank cut interest rates from 5.75% to 5.5% as its monetary policy committee judged that worsening conditions in financial markets and a tightening supply of credit had increased the risks of a sharp economic slowdown.
It was the first cut in UK rates for two years.
There was enormous pressure on the Bank to cut rates to slow Britain's apparent headlong rush into a recession.
The pressure has mounted this week amid more and more warnings from economists, business people, bankers and even regulators about the crunching of housing and mortgage lending, and the slowdown in retail sales.
The Bank of England finished its two day meeting overnight with the rates decision.
And 45 minutes later the European Central bank revealed its decision to remain steady, with a warning about inflation.
They came a day after the Reserve Bank of New Zealand left its official rate steady at 8.25%, and two days after the Reserve Bank of Australia left its cash rate untouched at 6.75%. Earlier the Bank of Canada had cut its rate in a surprise to 4.25%.
Next week it will be the turn of the US Fed to reveal its rate decision. A cut of 0.50% is in prospect, but the size will be decided by the jobless figures, out in the US Friday night, Australian time.
The chat in London had swung from no cut, to a close run thing, to hopes for a quick and immediate reduction of 0.25% to 5.5% from the central bank's Monetary Policy Committee.
The feeling has grown that a cut is desperately needed as the flow of poor figures and stark warnings have emerged from regulators, banks, retailers and investment bank economists shows growing alarm at the pace of the slump.
Retail sales a faltering: the big retailer, Tesco has just reported a solid 4.1% rise in first quarter same store sales, but that was down on the 5.6% same store sales rate in the same quarter of last year.
A host of retailers from jewellers to food and some larger discount chains have warned on sales growth and earnings in recent days, while figures show the number of new home mortgages sold is sliding rapidly. Building and construction is easing.
Tesco backed up with a call for a rate reduction.
Tesco's finance boss said inflation in Tesco stores was running at 0.8%; prices of non-food goods – from fashion to electrical goods – were still falling and while food prices were higher, the increase over the past three months was less than it had been over the same period last year.
He said the Bank should cut rates at the earliest opportunity: "We have a fundamentally different view of the risks of inflation than the Bank of England appears to have. The next move on interest rates has to be down, and soon, because the risk of inflation is limited but the risk of the consumer turning off is higher".
Tesco accounts for more than 31% of the grocery market. Its inflation figures exclude the impact of petrol price rises.
It seems Britain is undergoing its very own subprime mortgage shock in a similar fashion to the US: there's the rising problem of people with what we call no doc loans fixed rate in Australia that will have to refinance at higher interest next year, and the lenders have been hurt badly by investing in these and associated credit derivatives, not to mention investing in the toxic US subprime mess and associated credit securities.
For some banks in the UK it's a double or triple whammy that they didn't expect and they have tightened lending stands and slashed the amount of money available for housing, and cut lending to everyone, including other banks.
The interbank money market credit squeeze is more ferocious in Britain than anywhere else at the moment and key indicator, the London Interbank Offered Rate, or LIBOR is at a record premium to similar benchmarks in the US, which in turn is driving up the cost of mortgage refinancing for subprime borrowers on both sides of the Atlantic.
The pressure has become so much that Britain's financial regulator went public this week with a very pointed warning to banks and other mortgage providers.
The country's Financial Services Authority warned mortgage lenders to batten down the hatches as it told them to assume that market conditions will remain "very difficult for a sustained period".(
Britain's top financial regulator said more than a million people could find it tough to refinance their mortgages next year as the turmoil in financial markets deepens.
Clive Briault is the head of retail markets for the FSA, told the Council of Mortgage Lenders in London "it would be prudent to assume that market conditions will remain very difficult for a sustained period."
He said the Authority estimated that 1.4 million UK homeowners have fixed-rate mortgages that expire in 2008; he said many of these will "find it difficult (if not impossible) to refinance their mortgages on favourable terms, which will leave them facing a significantly higher rate on their borrowings, which may prove too much for them to afford."
And the Council head warned at the same function that British mortgage ending might fall by over $A60 billion next year.
Earlier in the week the London office of the US investment bank, Morgan Stanley advised its clients to step back from Britain's debt-laden economy, warning that the FTSE 100 stock index may fall 16% over the next year as the credit crunch forces banks to curb lending.
"The ongoing financial crisis will have a significant detrimental impact on economic growth," the bank's UK equity team wrote. "We believe house prices will fall 10pc next year, with the possibility of further declines
