The US Federal Reserve has cut its key interest rate for the first time in four years in a dramatic attempt to stop the slump in the US housing market from turning into a full-scale economic recession.
The 0.5 per cent cut, which was twice the reduction most analysts expected, triggered a huge rally on Wall Street but saw the dollar hit a new record low against the euro.
The rate cut is now expected to lead to an easing in the global credit crunch that has crippled the financial markets and left troubled lender, Northern Rock Bank, potentially short of funds.
The cut came too late yesterday evening for European markets, which had already staged a recovery after several days of heavy selling.
The British government reiterated yesterday its commitment to guarantee the savings of customers of Northern Rock, a move which helped halt the slide in Irish and European bank shares.
The UK treasury yesterday confirmed that the pledge given by the chancellor of the exchequer Alastair Darling extended to the bank's 24,000 Irish depositors. Northern Rock customers in Ireland and the UK had rushed to withdraw funds after it emerged on Friday that Northern Rock had sought support from the Bank of England.
A spokesman for Northern Rock in Ireland said there was an immediate reduction of customer calls and visits to the bank's Dublin branch after it became clear that the treasury's assurance covered Irish depositors.
In a statement accompanying the FederalReserve cut, which brings the federal funds rate to 4.75 per cent, the central bank said that the recent disorder in the housing and credit markets risked damaging the US economy.
"The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the statement said.
Pat McArdle, the chief economist at Ulster Bank, said there was some surprise at the size of the US cut and noted that the tone of the Federal Reserve's statement indicated that the US authorities would act again rather than risk further damage being caused to the US economy.
Mr McArdle added that the size of the Federal Reserve's cut made further European and British interest rate rises less likely.
The Dow Jones industrial average, which was up by 84 points right before the rate cut, soared by more than 200 points in the first 10 minutes after the announcement.
The Federal Reserve's action came as fresh evidence emerged that the worst downturn in the US housing market for almost two decades is intensifying.
RealtyTrac, which tracks foreclosures, reported that foreclosure filings - from default notices and auction sales to bank repossessions - were 36 per cent higher in August than in July and 115 per cent higher than one year ago.
The housing slump, which US central bankers admit is more severe than they expected, has fuelled the crisis in the market for sub-prime mortgages - home loans offered to customers with poor credit records. Dozens of US mortgage companies have gone out of business in recent months and the high level of sub-prime mortgage defaults last month triggered a global credit crunch.
