Fulfilling the predictions of most pundits and analysts, the Bank of England last Thursday announced a drop in interest rates of 0.25 per cent. The reduction by 25 base points had been broadly expected, although some bullish commentators had mooted the possibility of more drastic action by the Bank.

The decision may not have an immediate effect on mortgage holders, however, since in recent months, the correlation between interest rates and mortgage rates has become de-coupled. Of more concern to home owners now is the LIBOR rate, the interest rate banks charge one another for borrowing and lending. With the credit crunch beginning to bite, LIBOR has risen above the headline interest rate, and in a week when many mortgage providers raised their rates, the Bank's decision will have only an indirect influence on tracker and variable rate mortgages.

Analysts were unsurprised by the announcement. Rupert Pennant-Rea, a former Governor of the Bank of England, summed the bigger picture up succinctly: "The world's financial system is under great strain, and central banks and governments are trying to ease the pressure. But the obvious is worth restating: the MPC is not a central bank, not a government. Its purpose is much narrower - to set short-term interest rates to keep inflation close to 2 per cent. That means staying calm, moving in a measured way and bearing down on inflationary expectations that are still ominously high."

The spectre of inflation remains high on the economic agenda. Currently sitting at an official rate of 2.5 per cent, many people have faced considerably greater rises in utility and energy charges, most notably petrol. With high interest rates forming the Bank of England's chief brake on spiralling inflation, the decision to cut them was made even harder on Thursday morning, when the British Chambers of Commerce announced that UK companies are facing more pressure to raise their prices now than at any time over the last decade. This could force retail prices to rise considerably in the months ahead, adversely affecting the consumer.