The US Federal Reserve yesterday cut short-term interest rates by half of a percentage point, and hinted strongly that a further rate cut could be expected soon.
Analysts in Dublin said the move would increase pressure on the European Central Bank to cut its rates. The Bank of England may lower rates as early as next week when its monetary policy committee meets.
Investors on Wall Street had been hoping for a three-quarter-point cut and their disappointment was reflected in an immediate sell-off of stocks, driving the Dow Jones Industrial Average and the Nasdaq Composite to new lows for the year.
The decision not to cut more deeply was clearly influenced by positive signs for the economy, including a solid housing market, still-low unemployment at 4.2 per cent, modest job growth and a surprise rebound in consumer confidence in early March.
The Federal Reserve has now lowered the short-term inter-bank rate three times by a total of 1.5 percentage points since the beginning of the year in an effort to prevent a recession. The rate stands at 5 per cent, its lowest level since 1999.
In a statement, the Federal Reserve indicated alarm over global economic conditions for the first time in the current slowdown, a reflection of sharply rising concern in the US that deflation in Japan could spark a world economic crisis.
Given the goals of price stability and sustainable economic growth, "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future".
In these circumstances, it concluded, "the Federal Reserve will need to monitor developments closely". This form of words was widely interpreted as a portent of another rate cut, perhaps before the next Fed meeting on May 15th.
To underscore its determination to keep recession at bay, the Fed also cut the discount rate - charged on direct Fed loans to commercial banks - by a half point, to 4.5 per cent.
The dollar tumbled against major foreign currencies last night, losing nearly a cent against the euro following the rate cut.