The cut brings the interest rate to its lowest level for more than half a century.
Business leaders had called for the slash in rates to prevent the economic crisis worsening.
BRC director-generalStephen Robertson said: “This is exactly the type of decisive action we need during these uncertain times. With the threat of inflation fading, the Bank of England is right to concentrate on jump-starting the economy.
“Retailers are passing on VAT cuts and going further with big discounts of their own to help hard-pressed customers. The bank’s job is not done. It must continue to cut rates in the new year to get the economy heading in the right direction again.”
The cut comes on top of last month's dramatic reduction, when the Bank of England slashed the interest rate by 1.5 percentage points to 3 per cent; the biggest cut the bank has made since 1981.
Since the bank was founded in 1694, the bank's rate has never fallen below 2 per cent.
The reduction comes as retailers battle to draw in cash-strapped consumers in the run-up to Christmas.