The Bank of England has reduced British interest rates by 0.25 of a percentage point to 6 per cent in the fourth monthly reduction in a row, surprising the financial markets but confirming the downward path in rates towards the euro zone level of 3 per cent.

Immediately, sterling was marked lower on the currency market. But the decline on the day of 2.6 pfennigs to DM2.7633 was somewhat less than predicted by pessimists.

Equities fell back amid profit-taking after strong gains earlier in the week, with the FTSE index closing 47.6 points lower at 6,101.2.

The bank, commenting on the rate reduction, said its monetary policy committee (MPC) continued to be concerned by indications of slowing economic growth at a time when fears of inflationary growth in pay were receding.

"Since the MPC's December meeting, domestic data and survey evidence have, on balance, shown a continuing slowdown in the UK economy," said the bank. "The labour market remains tight but it seems to have reached a turning point."

Evidence from wage settlements and the bank's regional agents suggest an easing of upward pressures on growth in pay.

The risks from the international environment remain clearly on the downside, it said. "In these circumstances, the committee judged that a further reduction in interest rates of 0.25 per cent to 6 per cent was appropriate in order to maintain a path for inflation consistent with the target (2.5 per cent)."

At 6 per cent, the bank's key money market rate is 1.50 percentage points lower than the peak reached in the summer when the MPC became alarmed about inflationary wage settlements.

Rate reductions since then have mainly been prompted by indications of falling manufacturer and retail prices amid the sudden onset of the economic slowdown.

Now, the MPC has also changed its view on the inflationary dangers from pay awards, admitting for the first time that upward pressures on pay growth are lessening.

The admission has stripped the MPC of one of its last arguments for maintaining British rates at a significant premium to the euro zone rate of 3 per cent.

With prices and output on the decline in many sectors and wage growth moderating, the last bastion for defending high British money costs is the possible impact on sterling if interest rates are reduced too quickly.

Even this argument is losing its validity as sterling has resisted downside pressure during the period of rate reductions over the past four months.

Indeed, many economists believe sterling remains overvalued at current levels around DM2.75 and continues to urge measures that would permit the currency to move towards DM2.50 to alleviate downward pressures on the economy.

Another country outside the euro zone, Denmark, also cut interest rates yesterday by 0.2 of a percentage point.

Ahead, the City consensus is that most of the downward cycle in British rates in now in the past.

All that is being expected is a further reduction to 5.5 per cent by the middle of the year and to 5 per cent in a year's time.