The Bank of England’s Governor gave warning last night that Britain faces a “possibly quite sharp” slowdown this year after the US announced an emergency interest rate cut, its biggest for 26 years.

Mervyn King said that the Bank may be powerless to prevent a slowdown as the US Federal Reserve tried to prevent a global share rout and the world’s biggest economy plunging into recession. “We have little control over the strength of the economic winds buffeting our economy,” he said. “It is important that everyone understands the limits of central banks to smooth the economy.”

The move by the US Federal Reserve reduced America’s base interest rate by 0.75 of a percentage point to 3.5 per cent, a week before its scheduled interest-rate meeting. It was the first time that it has imposed an emergency rate cut since just after the terrorist attacks on September 11, 2001.

The Fed intervened after mounting fears of a US recession gave global stock markets the jitters on Monday, wiping £77 billion, or 5.5 per cent, off the value of Britain’s FTSE 100 share index, which suffered its biggest percentage loss since the September 11 atrocities.

The rate cut was imposed before America’s markets reopened yesterday morning after Monday’s public holiday and was designed to prevent similar losses in the US. The FTSE 100, which lost almost 240 points in its first hour of trading yesterday, took heart from the Fed’s action and closed up 161.9 at 5740.1, marking one of the wildest swings in its history.

Downing Street insisted yesterday that Britain was well placed to withstand the shocks to the world economy. Ministers fully expect a cut when the Bank’s Monetary Policy Committee meets next month, and possibly in March as well. But they cannot be seen to put open pressure on the Bank, which could be perceived as compromising its independence.

Even so, Ed Balls, the Schools Secretary and Gordon Brown’s close ally, went close to suggesting that cuts were on the way. “The good news from Britain’s point of view is that inflation is low, and is coming down,” he told the BBC. Countries in which inflation was up could not cut rates, he said. “Those days are behind us in Britain. The Bank of England has got flexibility. Inflation is low and we will see what happens in the next few months.”

The Bank of England cut rates in December to 5.5 per cent but left them unchanged this month. No 10 said that an announcement on the governorship of the Bank of England could be expected shortly. Mr King is likely to be reappointed for a second term.

Most economists expect the Fed to impose a further rate cut, probably of 0.5 percentage points, at its next scheduled meeting on Tuesday and Wednesday next week. An additional 0.5 percentage point cut was crucial if the market’s growing confidence was to be sustained, they added.

Robert Shiller, Professor of Economics at Yale University who predicted the burst of the dot com bubble shortly before it happened in 2000, said: “The rate cut is a very dramatic move. In some ways it will boost the market’s confidence, but it could also have the reverse effect because it shows that the Federal Reserve is alarmed.”

The Dow Jones index of shares fell by 4 per cent immediately after the rate cut was announced as shareholders panicked, believing that such a drastic measure could mean that America’s economic outlook was even bleaker than expected.

The shares bounced back as dealers came to appreciate that the Fed was committed to helping the economy by reducing the cost of borrowing.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts