The move, which follows a similar cut by the Federal Reserve in the US, the European Central Bank and several other European banks, is likely to benefit independent retailers, which have been hit by spiralling costs and falling sales. It could also encourage more businesses to seek investment from both traditional financial institutions, such as banks, and alternative sources of finance, such as asset-based and invoice finance.

"Cutting interest rates will have been a difficult decision to make, but the FPB believes it is the correct one," said the FPB's Director of Finance, Nick Palin. "With many analysts predicting that the UK is already in a recession, or very close to one, this decision should boost the market and hopefully will inject some confidence in to it."

The coming months are especially crucial for smaller retailers, which rely on strong trade now and in the run-up to the busy Christmas period. By cutting the main lending rate by half a percentage point, the Bank of England's Monetary Policy Committee has reassured owners of small businesses that their concerns are finally being addressed.

The cut will also be welcomed by smaller businesses looking to borrow to invest, and those which have variable loans, because it will mean a reduction in their repayments.

"In general, this decision is good news for everyone," said Tim Rhodes of Skypark Freight Limited in Liverpool. "The Bank of England needs to stop worrying about inflation and start controlling the economy from the point of what people are paying, and that means interest rates."

Mr Rhodes added: "I would like to see more cuts and for the rate to go as low as possible; however, the Bank of England needs to make sure that the rates cut is passed on by the retail banks so that customers and businesses feel the benefit."