Bumper US interest rate cut aims to boost flagging economy

US interest rates have been slashed for the first time in more than four years – by more than many expected – amid fears the world’s largest economy is flagging.

The US central bank, the Federal Reserve, brought interest rates down by 0.5 percentage points 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.

Recent 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.

The Fed signalled in its statement that while it was confident on the inflation front, it noted a slowdown in the pace of hiring.

One one member of its rate-setting committee dissented on the 0.5 percentage point reduction. Financial market participants were split on whether it would opt for the 0.25 instead.

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.