However, analysts said the seven-member MPC was inclined toward a cut by the strength of the pound and the decline in inflation below its 2.5 percent target level. "The key factor is that there is still a soft tone to the U.K. economy and a clear absence of inflation," said Claudio Piron, treasury economist at Standard Chartered in London.

Data this week suggesting a strong recovery in the housing market and an improvement in service sector sentiment had led some observers to reduce expectations of a cut after five previous revisions had lowered rates from 6.5 percent last September. "There will be a sense of relief that the medicine has worked," said Piron.

However, price pressures from lastmonth's government budget are likely to feed through to inflation before the next MPC meeting on May 6. This would push inflation above the target level, making it more politically attractive for the committee to cut rates now rather than later.

Markets have already priced in a half-point cut by June and economist David Owen at Dresdner Kleinwort Benson predicts rates will drop to 3.5 per cent by the end of next year. The London market dipped following the decision after reaching record highs on two consecutive days. The FTSE 100 was down 0.2 percent at 6,460.5.

The cut is expected to have little impact on the pound which has stabilized after hitting an 18-month low against the dollar, and firmed against the euro. The Bank of England's cut comes in advance of more cuts expected in Europe. The European Central bank is expected to trim rates in the euro-zone from 3 per cent to 2.75 per cent later Thursday.