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The bold move was welcomed by business lobby groups that had called for such a rate cut, reports the Financial Times.
Richard Lambert, head of the Confederation of British Industry, commented: "This cut should help to ease conditions in the credit markets and allow banks to pass the benefits on to their customers."
Meanwhile, the shadow chancellor George Osbourne described the move as "a shot in the arm" for the UK economy which demonstrated "how sick the patient is".
The European central bank followed the Bank of England's lead, reducing interest rates by a more cautious half a per cent.
According to Voice of America News, the interest rate cut failed to stop major European stock and shares falling by between five and seven per cent.
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