Speculation was mounting last night that the Bank of England would cut interest rates as soon as today after the Federal Reserve led three other central banks in a bold attempt to avert a recession by slashing rates.
The US Federal Reserve Board, the European Central Bank and the central banks of Switzerland and Canada all cut their rates by a half-point in a co-ordinated effort to bolster consumer confidence and share prices.
The Fed cut the main US rate from 3.5 to 3 per cent, its lowest level for more than seven years, just over an hour before the New York Stock Exchange opened for its first trading day since last Tuesday's terrorist attack.
In a statement the Fed said: "Even before the tragic events of last week, employment, production and business spending remained weak and last week's events have the potential to dampen spending further."
But the concerted effort failed to prevent a sell-off on Wall Street. The Dow Jones fell as soon as the market opened, trading down 626 points or 6.5 per cent and falling below 9,000 for the first time since the Russian financial crisis in 1998.
The market mounted a muted recovery after the ECB surprised observers with a cut in rates to 3.75 from 4.25 per cent. The ECB said it had acted "in concert" with the Fed. "The recent events of the US are likely to weigh adversely on confidence in the euro area, reducing the short-term outlook for domestic growth," it said.
The Bank of England declined to comment on the interest rate decisions, but economists said they expected the Monetary Policy Committee to act ahead of its scheduled meeting on 3 and 4 October.
"The surprise was that the Bank of England did not join in," said Nick Stamenkovic, a senior analyst at Nomura International bank. "It may just be a matter of time."
Judi Collins-Thompson at BNP Paribas in London said the most likely time for a move would be this morning. "It seems very unlikely the Bank will wait until 4 October to cut," she said. "A half-point cut also looks more likely rather than the quarter-point we were originally expecting."
While the Fed was cutting rates, the US Treasury Secretary, Paul O'Neill, attempted to bolster confidence in the markets, saying he did not believe a recession was inevitable. In a series of interviews for US television networks before share trading started he urged investors to "buy American" as he sought to rally confidence.
He insisted that he did not think a US recession was inevitable even after the attacks on New York and Washington. "I think we're going to demonstrate the resilience of the American economy," he told ABC News. "If I could buy stock, I'd be buying a whole lot today."
He forecast the US economy would grow in the last quarter of the year – an outcome that would prevent a technical recession of two quarters of successive contraction.
"Into next year we should return to a more normal American growth rate of 3.2 per cent or something in that order of magnitude," he added.Reuse content