Central banks cut rates

The US Federal Reserve and the European Central Bank today cut half a point off interest rates in an aggressive move intended to avert a collapse in world markets.

On a tumultuous day for traders, the Fed shaved rates to 3% an hour before Wall Street reopened for business after a four-day closure caused by last week's suicide attacks in New York and Washington. Despite the Fed's move, a "patriotic rally" failed to materialise and the Dow Jones industrial average shed more than 500 points in the first hour of trading. It stabilised in lunchtime trading and was hovering around the 9,000 mark. The Nasdaq index of technology shares also slumped, falling 100 points by lunchtime.

Hours later the European Central Bank (ECB) also cut rates by 0.5% to 3.75%. The ECB said it was acting in concert with the Fed - despite denials last week from ECB officials of moves to coordinate rate cuts. The Bank of Canada also cut rates by 0.5%.

Central bank action followed a week of frenetic activity among finance ministers and central bankers around the world in response to an attack that paralysed the world's financial capital for four days.

Markets have already fallen by 8% since last Tuesday's attacks; analysts fear that they could fall by another seven percentage points. The Fed's policy making body, the open market committee, was not scheduled to discuss interest rate policy until October 2, but with markets in Europe and Asia rattled by last week's events, the US central bank felt compelled to act.

In another significant development, the International Monetary Fund and the World Bank said they would cancel their annual meetings later this month because of security concerns. The world's two leading financial institutions had already shortened their scheduled week-long Washington meetings, one of the biggest fixtures in the financial calendar, to a two-day session on September 29-30 amid security concerns over anti-gloablisation riots.

The chancellor, Gordon Brown, hinted at Fed and ECB action yesterday when he said that governments and central banks would take "whatever action is necessary" to prevent a slump in major economies. The US vice-president, Dick Cheney, also tried shore up confidence yesterday, saying that he expected the US to make a quick recovery from the current slowdown.

The Fed had already lowered rates seven times this year to avert a hard landing and analysts expect it to push rates as low as 2.75%, the lowest since the Cuban missile crisis. Other central banks are expected to follow suit in coming weeks.

The US economy was already in danger of falling into recession after a decade of growth, and the widespread expectation is that last week's deadly strikes will push America into a slump. Even before last week's attacks, official data showed a big drop in US consumer confidence.

Central banks have reacted rapidly after hijackers struck New York and Washington. The Fed last week made sure the financial system had enough money to function, by selling $80bn (?54bn) to the European Central Bank and the Bank of England. Congress voted to spend $40bn for compensation, defence and rebuilding efforts for New York.