Fed slashes interest rates to 1.5 per cent

China cut its key rate 27 basis points and its reserve requirements for banks by half a percentage point.

The Bank of Japan, with rates at just 0.5 per cent, did not ease but the Fed said the BOJ expressed its strong support for the coordinated policy action.

“Incoming economic data suggests that the pace of economic activity has slowed markedly in recent months,” the Fed said in a statement.

“Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

Market reaction was surprisingly muted with stock markets only trimming deep losses in response.

MSCI’s benchmark world index was down 2 per cent compared with losses of 2.9 per cent when the cuts were announced. The pan-European FTSEurofirst 300 was down 1.4 per cent some 10 minutes after the move compared with losses of around 3.8 per cent beforehand.

For weeks, markets have been battered by fears that frozen money markets will stall business activity and send industrialised nations spiraling deep into recession.

“The central banks of the world have finally woken up to the gravity of the current situation,” said Charles Diebel, head of interest rates strategy at Nomura in London.

“This is a major step to convincing the world that they are serious about stabilising the current crisis,” he added. “This is not a panacea to cure all the world’s ills but it will help and certainly should help to give the markets some more breathing space.”

Governments have been frantically bailing their banking sectors out, to keep them afloat. The Bank of England praised the country’s plan, announced on Tuesday, to boost bank liquidity, saying rate cuts would not be enough to end the crisis.

“The Committee notes that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required,” the BoE said.

The Fed said that while inflation has been high, recent declines in energy and other commodity prices had tempered inflation risks.

It said the vote to cut US rates was unanimous and that inflation expectations appeared to be diminishing which could help support price stability.

“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability,” the Fed said.

Hong Kong earlier slashed the borrowing rate it charges banks by a full percentage point, a day after Australia’s central bank delivered its biggest interest rate cut in 16 years, also a full point.