HSBC today pledged to pass on the full 1 percentage point cut in interest rates to borrowers on its variable-rate deals, following the Bank of England's decision to reduce interest rates to 2 per cent.

Britain's biggest bank is lowering its standard variable rate (SVR) from 5.44 per cent to 4.44 per cent. A borrower with a £150,000 interest-only mortgage will see their monthly mortgage bills fall by £125.

Yesterday Lloyds TSB, the fifth biggest lender, said it would also reduce its variable rate by the full amount. Bristol & West, owned by the Bank of Ireland, has also announced it is passing on the cut.

Barclays has announced that its variable rate will fall by more than the Bank of Engalnd base rate. Woolwich, its mortgage brand, will lower its SVR by 1.15 percentage points to 5.49 per cent from January 1. However, it did not cut rates after the Bank of England's historic one and a half point reduction last month.

The Bank of England reduced interest rates by 1 percentage point today in an effort to break the deadlock in the mortgage market, which has seen lending to new customers plummet.

A recent government report predicted that the problems facing the mortgage market were so severe that lenders would collect more repayments next year than they would lend in new mortgages.

It is the third successive cut in the base rate in as many months. The last time that base rate was at 2 per cent was in 1951.

Millions of borrowers on tracker deals will automatically benefit from today's interest rate reduction because their interest rate is pegged to the falling base rate.

A further one million borrowers on variable-rate deals will have to wait to find out if their lenders will pass on the cut. The Council of Mortgage Lenders (CML), an industry trade body, has already warned that not all borrowers will benefit.

Michael Coogan, director general of the CML, said: "Not all lenders are the same and it is not realistic to expect them all to react in the same way to the rate cut — although where they believe they can cut mortgage rates, they will."

HSBC was one of the big lenders to resist pressure from the Government to pass on the full 1.5 percentage point cut by the Bank of England when rates fell in November. It eventually passed on a 1 percentage point reduction.

Almost every leading high street bank eventually reduced their variable rates by the same amount. However, only 10 per cent of building societies passed on the full cut to homeowners.

Mortgage experts argue that high street banks which have received injections of cash from the taxpayer as part of the Government's £37 billion plan to boost the banking system will have little choice but to pass on the cut.

Melanie Bien, director of Savills Private Finance, a broker, said: "The biggest lenders are most likely to reduce their standard variable rates by the full 1 per cent, particularly those who have benefited from the billions of pounds of taxpayers' money used in the bank bailout as the Government will be watching them closely. But the smaller lenders are unlikely to be able to afford to pass on any of the reduction."

Meanwhile, lenders have begun pulling tracker deals for new customers in an effort to protect their profit margins. Alliance & Leicester and Abbey are withdrawing their tracker deals by the end of the day. Lloyds TSB pulled its deals last night. It was offering new trackers pegged at 1.99 above base, or 3.99 per cent.

There was good news for around 550,000 borrowers on tracker mortgages with the Halifax, Britain's biggest lender, after it announced this morning that it would not enforce a lower threshold, or "collar", on its tracker mortgages preventing rates from falling if the base rate dropped below 3 per cent.

It follows the intervention of the Financial Services Authority, the City watchdog, which warned Halifax that the collar might not be enforceable because it was not included in an important mortgage document given to homeowners when they sign up to a new deal, known as a Key Facts Illustration (KFI).

However, another 600,000 borrowers on tracker deals from several building societies, including Nationwide, Skipton, Yorkshire and Norwich & Peterborough, will be prevented from benefitting from today's cut because the mutuals have collars at around 3 per cent, which are fully explained in their KFI.