Fed to cut rate as US revival stalls

Wall Street and the City are betting heavily on an emergency rate cut from the Federal Reserve later this week in an attempt by the US central bank to halt the slide back into recession by the world's biggest economy.

A strong rally in share prices in New York on Friday reflected the belief that the Fed will take the initiative after becoming alarmed at the mounting evidence over the past few months of a stalled recovery.

Although interest rates are already at a 40-year low of 1.75% in the US, dealers expect a reduction of 0.25 percentage points on Wednesday, with the Fed's move likely to to put pressure on the European Central Bank and the Bank of England to follow suit when they meet the following day.

Hopes of a co-ordinated cut in rates by the three central banks are, however, believed to be slim. Analysts said that the ECB was unlikely to move, while the chances of a reduction by the Bank's monetary policy committee were no better than 50-50.

Paul Ashworth of Capital Economics said: "While we think that the Fed will justifiably cut US interest rates to restore confidence in response to the raft of weaker data out last week, we expect the ECB to leave eurozone rates unchanged, even though the deterioration in activity cries out for lower rates in the eurozone too."

Speculation that the Fed will act has risen markedly in the past fortnight as data has been published showing confidence waning, consumer spending falling, manufacturing struggling and unemployment rising.

Europe's stuttering economy is being affected by the US slowdown, but the ECB's decision comes two days after European Union finance ministers meet in Brussels to discuss possible reform of the stability and growth pact.

Europe's central bank has been angered by the public repudiation by France of the mechanism designed to provide discipline for fiscal policy across Europe.

Financial market analysts said yesterday that the ECB would want to show its disapproval of the budgetary backsliding by EU member states by keeping rates on hold this week.

Jean-François Mercier, economist at Schroder Salomon Smith Barney, said: "The latest round of euro-area economic data and surveys have been weak, but not weak enough to point to a renewed contraction in activity." He added that the ECB remained concerned about inflation and "the ongoing debate about the stability and growth pact".

The MPC voted 6-3 in favour of keeping UK interest rates at 4% last month, their lowest level since the early 1960s, with the committee split between members concerned about the gloomier global outlook and those worried about the continued rise in house prices.

Ian McCafferty, the CBI's chief economist, said: "The Bank has a difficult balancing act to perform, with factors such as a manufacturing recession on one hand and consumer credit concerns on the other.

"That is why business is not pressing for an urgent cut now. Companies want long-term stability and would not thank the Bank if a rate cut was made and then swiftly reversed. But if general economic conditions significantly deteriorate, CBI members would look for a decisive cut of half a percentage point."