US rate cut may spark UK move

The United States last night acted to boost a flagging American economy and head off the threat of a global recession by slashing interest rates for the first time in two years in a move which stunned financial markets.

With confidence collapsing in the wake of last year's surge in the oil price and falling hi-tech share prices, the US Federal Reserve, led by Alan Greenspan, grasped the initiative by cutting the cost of borrowing by half a percentage point to 6% to bolster consumer and business sentiment.

The move was welcomed by president-elect George W. Bush, although he said further action would be needed to stimulate the economy.

City analysts believe the decision could lead to the first UK interest rate cut since last February. The bank's monetary policy committee meets next week and has been facing calls from industry leaders to cut the current 6% level.

Neil Parker, market strategist for the Royal Bank of Scotland, said: "This is only going to heighten expectations of interest rate cuts in the UK. I am sure the Bank of England's monetary policy committee will be surprised by this."

Justin Urquhart-Stewart, of Barclays Stockbrokers in London, said the move could have a negative effect. He said: "This is not Greenspan this is Greenpanic." He said he feared a whiff of deflation in the Fed move - deep concern that the market might shrug off the rate cut and that the economy would still weaken.

The US rate cut triggered a rally of America's technology-heavy Nasdaq share price index which initially soared by 11%. The Dow Jones industrials index, which reflects the fortunes of so-called old economy stocks, rose 2% and the dollar pared losses against the resurgent euro.

The cut, announced after an emergency session in Washington, came as a big surprise in global financial markets, which had not been expecting a rate cut until the end of the month, at the Fed's next scheduled meeting.

The last time the Fed changed rates between timetabled meetings was in September 1998, when the global economy was in danger of being dragged into recession by the fall-out from the Asian financial crisis.

Analysts said the Fed's prompt action was an indication of the seriousness of the rapidly deteriorating situation in the US, which accounts for 25% of the world economy.

In the UK, two members of the bank's nine-person mone tary policy committee - Sushil Wadhwani and DeAnne Julius - have already begun voting for lower UK interest rates, arguing that the danger from the global slowdown in growth far outweighs domestic inflationary pressure.

Speaking before the US decision, the deputy governor of the Bank of England, Mervyn King, denied US rate cuts would automatically be followed by a similar UK move.

The Fed's announcement that it was lowering its key federal funds lending rate was issued halfway through an economic forum being held in Texas by the president-elect.

Mr Bush called it a bold action, as did the head of General Electric, Jack Welch, one of a number of prominent businessmen at the summit. Mr Bush said: "We have got to be mindful of the warning signs and today Alan Greenspan showed he was."

However, the president-elect continued to stress the need for his significant tax-cutting proposals and urged Congress to take a "bold step".

Mr Bush said his specially convened meeting had been dominated by talks of a slowing economy. "The warning signs are real, people's bottom lines are being affected. Talking to people here it is clear that a rate reduction of half a per cent is not enough."

Explaining its decision in a formal statement, the Fed noted that inflation was under control and said that it had decided to act "in the light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power."

Figures published on Tuesday showed US manufacturing suffering the worst conditions since April 1991 when the US economy was emerging from recession.