Six central banks, including the Bank of England, have cut interest rates by half a percentage point in an effort to steady the faltering global economy. No decision on UK rates had been expected until Thursday - and the move puts the interest rate at 4.5% from 5%.

The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%. The unprecedented, co-ordinated step came amid slumping world stock markets.

The central banks of Canada and Sweden and Switzerland all took similar action in the co-ordinated move. China also cut its rate, but by 0.27 percentage points. Australia reduced rates by a whole percentage point earlier this week.

The moves had some initial effect on stock markets. European markets pared their heavy losses after the announcement, only to fall again. And index futures rose sharply, then also fell, indicating a lower opening.

Federal Reserve officials said this was the first time ever that the Fed coordinated a reduction in interest rates with other central banks, though the United States has periodically joined with other countries to intervene in currency markets to stabilize foreign exchange rates.

The closest thing to a precedent for Wednesday’s action came in November 2001, when the Fed and the European Central Bank announced a rate reduction on the same day. But those actions were nominally independent, and they did not involve any additional foreign central banks.

The cut came despite what had been a divergence of views between the United States and Europe ever since the financial crisis erupted in August 2007. The European Central Bank had been much more reluctant to lower interest rates, because policy makers there tended to see the mortgage meltdown primarily as an American problem with secondary ripple effects in Europe.

But any lingering comfort outside the United States evaporated in the last week, as money markets froze up around the world and major corporations and banks across Europe began suffocating from their ability to do even routine financial transactions.

Responding to the interest rate cut, UK manufacturers' group the EEF welcomed the "bold and decisive move" it hoped would "arrest the current crisis and collapse in confidence". "Coupled with the plan to shore up the financial system today's co-ordinated moves should help arrest the potential slide into depression," said the EEF's chief economist Steve Radley.

Chief international economist at Capital Economics, Julian Jessop, said that the rate cut would "provide at least a temporary boost to confidence".

The Bank of England's Monetary Policy Committee said that getting inflation down to the government's 2% target remained its goal.The latest data puts inflation at 4.7%, and it is likely to rise above 5% in coming months before falling, the MPC said.
But analyst Peter Warburton of Economic Perspectives said the rate cut and government intervention should have come earlier.

The MPC said that cuts in interest rates alone "could not be expected to resolve the current problems in financial markets" and that they welcomed the government's plan to recapitalise the major UK banks.