Europe and US central banks cut interest rate

Central banks around the world cut interest rates in unison on Wednesday, responding to a worldwide clamor for concerted action to contain the worst financial crisis since the Great Depression.

The surprise announcement set off volatile trade in global stock markets, which have seen trillions of dollars in wealth wiped out over the past year. But it failed to win a ringing endorsement from any one market.

The Dow turned positive mid-afternoon in a see-saw session, after European stocks nose-dived 6 percent. Emerging markets got clobbered with currencies falling and stocks trading at two-year lows.

It was the latest jolt in a worldwide crisis that has unsettled investment bankers and small investors alike, transformed Wall Street and reshaped the U.S. presidential election.

Europe's financial sector was also in turmoil with Britain saying it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks.

Iceland took over two of its largest banks, abandoned support for its withering currency and sought an emergency loan from Russia.

"Confidence has been lost and it's difficult to regain," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto.

The U.S. Federal Reserve said it was cutting its key federal funds rate by half a percentage point to 1.5 percent and China, the European Central Bank and central banks in Britain, Canada, Sweden and Switzerland followed suit.

The coordinated cuts included China for the first time. The Bank of Japan said it saw no need to cut Japanese interest rates but that it strongly supported the coordinated action.

Earlier, Hong Kong unveiled a surprise rate cut, slashing its main interest rate 100 basis points to match a similar cut by Australia a day earlier.

"The central banks of the world have finally woke up to the gravity of the current situation," said Charles Diebel, the head of interest rates strategy at Nomura. "This is a major step in convincing the world that they are serious about stabilizing."

Stocks have kept falling even after the United States approved a $700 billion rescue plan to buy toxic debt from financial institutions so they can clean up their balance sheets and start lending again.

While the moves should restore some investor confidence and help calm turbulent markets, they also reduce the Fed's future options with interest rates that much closer to zero.

The credit markets remained in disarray. The benchmark federal funds rate -- the overnight cost banks charge to each to borrow surplus reserves -- was 3 percent after trading as high 7 percent before the rate cuts. That was still 150 basis points over the new target rate for fed funds of 1.5 percent, the lowest since August 2004.

However, the critical borrowing rates on unsecured lending between banks and on commercial paper remained stubbornly high, suggesting banks were not yet confident enough to clear the lending logjam.

With banks still desperately short of U.S. dollars, one analysis suggested the crisis might justify wholesale use of the $4.5 trillion of U.S. currency stashed in global central bank vaults.

As the world's biggest holder of currency reserves, China could yet play an important part in calming the storm.