US interest rates have been slashed for the first time in more than four years – and by more than many expected – amid fears the world’s largest economy is flagging.
Not since the early days of the COVID-19 pandemic has there been a drop in the cost of US borrowing as the US central bank, the Federal Reserve, on Wednesday evening brought interest rates down by 0.5 percentage points.
The monetary regulator, known as the Fed, brought the interest rates down to 4.75% to 5%.
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
Read more: What next for interest rates?
Bringing down inflation to 2% is a primary goal of the Fed and it has used interest rates to draw money out of the economy by making borrowing more costly.
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Latest figures show the Fed is not far from its target – inflation fell to 2.5% in August, the lowest rate in three years.
But signs of a weakening economy emerged last month as data on job creation led to recession fears.
While stock market reaction is not within the Fed’s remit, there were jitters among investors which led to a global stock market sell-off early in August.
Those fears did ease, however, after a stronger performance for job creation eased financial market fears this month.
What about the UK?
It comes as the UK central bank the Bank of England meets on Thursday to make its own interest rate decision.
While the Bank will focus on UK economic data – and on Wednesday afternoon was expected by markets to hold rates – it could be influenced by US decision-making.
Lower interest rates tend to weaken currencies, so a big cut from the Fed could be good news for the pound.
While being able to buy more dollars is good news for people holidaying in the US and paying for imports like oil, it’s bad news for exporters who get less for their goods as a result and have a less competitive product.
Lower exports can slow inflation, meaning the Bank could be more likely to cut.