Ben Bernanke, chairman of the US Federal Reserve Bank, was yesterday under mounting pressure to cut American interest rates as early as next week as global stock markets plunged on fears of a worldwide credit crunch.

An overnight 3 per cent tumble on the Hang Seng index in Hong Kong was followed by a 4 per cent slide on the FTSE 100 and falls of as much as 3 per cent on some European markets. Wall Street sank by as much as 200 points before clawing back to close 31.20 points down at 13,239.50 after the Federal Reserve repeatedly injected funds into short-term money markets to ease liquidity.

Equity traders marked down shares on fears that the growing crisis in America’s sub-prime mortgage market would spread so that major banks and pension funds would have difficulty obtaining new credit as borrowing costs increase.

Wall Street braced itself for a quarter-point cut in the cost of borrowing to 5 per cent as interest rate futures priced in an immediate reduction.

Speculation rose in New York yesterday that the Fed would cut rates before the next scheduled meeting in September. An emergency rate cut was last made on September 18, 2001, to help the markets to cope after terrorist attacks on the World Trade Centre. Ed Yardeni at Yardeni Research in New York, said: “They probably have to cut rates and probably before their scheduled meeting.”

Yesterday, for the second day in a row, central banks sought to avert tightening credit conditions by injecting cash into the banking system. Between them, America, Europe, Japan, Australia and Canada added about $132 billion (£65 billion) of cash-into the banking system, with the Federal Reserve providing $38 billion of reserves and promising there would be more funds available “as necessary”.

The US injected the $38 billion, the biggest single loan since the weeks following September 11, in three tranches, to try to prevent the Federal fund interest rate from rising above 5.25 per cent as demand for funds soared. The European Central Bank injected €61 billion (£41 million) after lending a record €95 billion on Thursday.

However, some money market traders were surprised that the Bank of England did not offer to pour extra money into the London market despite a 232 point fall on the FTSE 100. Earlier this week, Mervyn King, Governor of the Bank of England, said that he welcomed ructions in the credit market, and has long questioned whether the stock market has adequately priced in risk. Overnight interest rates in London soared to 6.5 per cent, well above the 5.75 per cent base rate.

Jason Simpson, bond strategist at ABN Amro, said: “I’m surprised they haven’t got someone to say ‘we are keeping an eye on this and will provide liquidity if we feel the market needs it’. Given they are of a tightening bias they are probably not that upset about it.”

But the stock market fall in London, its biggest one day points fall for four and a half years, triggered reassurance from Gordon Brown: “We continue to do everything in our power to maintain the stability of the British economy.”

FTSE’s dog days

Sept 11, 2001 -287.7 points (5.7%)
Apr 1, 2000 -264.3 points (3.8%)
Oct 20, 1987 -250.7 points (12.2%)
Oct 19, 1987 -249.6 points (10.8%)
Aug 10, 2007 -232.9 points (3.7%)

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