Global share prices bounce back after shock U.S. rate cut

12 April 2012

Share prices soared after the U.S. Federal Reserve dramatically intervened to calm the panic in world financial markets.

In a move that took traders by surprise, the central bank lowered the rate at which it lends to commercial banks and signalled that it could also reduce its main interest rate.

Scroll down for more

Stock markets across the world have seen dramatic highs and lows

The move gave the kiss of life to global stock markets and the effect in London was immediate. The FTSE 100 moved back above the psychologically-important 6,000 level.

At one stage in the afternoon, the index of leading shares was up 216 points to 6,075. It ended the day's trading 205 points ahead at 6,064.

On Wall Street the Dow Jones Industrial Average rallied 187 points to move above the crucial 13,000-point "resistance level".

The Fed's move sparked hopes that further hikes in UK interest rates will not materialise as central banks and governments look to cut the cost of borrowing in order to avoid recession.

In a stark statement, the Fed warned traders that the "downside" risks to the world's largest economy have increased "appreciably".

It added: 2Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth."

The Fed's move will offer cheaper funding to U.S. banks that have been caught up in the turmoil in credit markets.

Banks have been hoarding cash, sparking a worldwide credit crunch.

The panic has been provoked by fears that major financial institutions are sitting on hundreds of billions of dollars of losses following the collapse of the riskier end of the U.S. mortgage market.

The cut in the Fed's "discount rate" could be followed by a reduction to its principal interest rate - the Fed Funds Rate - which stands at 5.25 per cent, half a point lower than the Bank of England's main interest rate.

Scroll down for more

Shares bounced back after the U.S. Federal Reserve dramatically intervened to calm the panic in world financial markets

The stock market rally provided welcome relief to investors. Before yesterday, Britain's top companies had collectively shed nearly £130billion of market value in a week of brutal declines.

Some market experts warn, however, that the rollercoaster ride is not yet over and that yesterday's rally might offer only temporary relief from a more long-term downturn in share values.

They warned that investors shouldn't be enticed back into the market, because the world financial system remains under huge strain.

Jim Wood Smith, an economist at City brokers Williams de Broe, said: "I suspect that sober reflection over the weekend will focus on the likely downsides of this move. Do not get sucked into this rally."

Andrew Clare, of Fathom Consulting, said: "It is going to be quite a while before the markets can settle down. We are in for a rollercoaster ride on the markets for weeks to come."

David Kern, of the British Chambers of Commerce, said the Bank of England's Monetary Policy Committee should now abandon any notion of lifting rates above 5.75 per cent.

"The Fed's decision highlights the growing threat to the global economy resulting from the current turmoil in the international financial markets," he said.

"While we are not calling for an immediate cut in UK rates, we think it is important the MPC makes it absolutely clear that UK interest rate increases are no longer on the agenda at present and, if global threats worsen, they will not hesitate to cut rates as well."

HOW MARKET TROUBLES AFFECT YOU

Turmoil in world financial markets will not worry investors alone. Pensions, mortgages and jobs will also be affected.

• Pensions

Britain's biggest 200 final-salary pension schemes have lost up to £25billion over the past eight days.

Previous share collapses led to shake-ups in pension arrangements which have left many workers worse off.

More companies may decide to stop offering "gold-standard" schemes based on length of service and final salary.

Their employees would be locked into schemes where the pension pot grows according to how much money is paid in and how it is invested.

• Mortgages

House buyers looking for a good-value home loan might find the better deals are harder to come by.

Banks and building societies are finding it harder to borrow, on favourable terms, money which they can then advance to mortgagees.

This could be particularly bad news for the more than two million people who will be looking for a new mortgage when their cheap fixed-rate deals end over the next 18 months. Yesterday, Victoria Mortgages announced that its interest rates for high-risk "sub-prime" customers will go up by 2.5 per cent. Other lenders are acting similarly.

• Jobs

Companies are finding it increasingly difficult to borrow as a result of the "credit crunch".

Banks are taking a much tougher line on how much they will lend, and to whom, in the wake of the crisis in the U.S. sub-prime mortgage market.

If companies cannot borrow, they cannot invest in their businesses, in new sites and equipment. This hampers economic growth and threatens jobs.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in