Business leaders last night urged the Bank of England to follow America's lead and cut interest rates in an attempt to stave off recession.
In a surprise move yesterday, the US Federal Reserve reduced rates by three quarters of a point prior to the start of trading but the move paid off, helping to bolster the markets after Monday's dramatic falls. Traders breathed a sigh of relief last night as the FTSE 100 closed up 161.9 points at 5740.1, a three per cent increase on Black Monday.
The Bank of England is now widely expected to follow America's lead with a cut next month but businesses yesterday said the Bank should be ready to take action sooner if needed.
All eyes will be on the Bank today when the minutes of January's Monetary Policy Committee rates meeting is released. Analysts will be scrutinising the notes for clues to the Bank's current monetary policy. The Bank said yesterday it had no immediate plans to bring forward its scheduled rates meeting, due to be held on February 6 and 7. Unscheduled rate moves are rare in the UK.
The Bank of England last made a surprise move to cut rates after 9/11, when the MPC voted to cut rates by a quarter point amid stock market turbulence.
However, business leaders urged the Bank to be flexible.
David Kern, economic adviser to the British Chamber of Commerce, said: "Although unexpected, the Fed's decision highlights the mounting risks to the global economy resulting from the credit crisis.
"While we believe that talk of a recession should be rejected, we call on the MPC to be alert to the risks.
"If the situation worsens, the MPC should consider an emergency cut in UK interest rates, even before the scheduled time of the next meeting in early February."
Louise Bennett, chief executive of the Coventry and Warwickshire Chamber of Commerce, spoke for many in the region when she said: "There have been strong hints that interest rates would come down in February and I believe events in the US and across the global markets will confirm that.
"It has been a tumultuous start to the year across the globe and the Federal Reserve's decision is a bold, decisive move - some have even suggested that they have been panicked into the largest single cut for more than a quarter of a century. And, while I do not see the Bank of England taking such a big step, the evidence suggests that rates will fall for the second month in the past three the next time the Monetary Policy Committee meets."
The Fed had not been expected to reduce borrowing costs until the end of the month, but said the move had come amid gathering economic gloom.
It revealed in a statement accompanying its decision: "The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.
"While strains in short-term funding
markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.
"Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets."
The Fed also cut the discount rate - the interest that banks charge each other on overnight loans - by three-quarters of a point, to four per cent.
Despite yesterday's gains they were not enough to offset Monday's hefty losses, when the FTSE 100 Index suffered its biggest one-day points drop since the September 11 terrorist attacks in 2001.
Banks were among those to benefit the most from the rally. Lloyds TSB lifted nine per cent, while Barclays was eight per cent ahead.
Housebuilders with significant US operations, such as Taylor Wimpey and Barratt Developments, also received a boost from the move to trim US rates, up six per cent and nine per cent respectively.