Interest rates across the world were slashed yesterday as central banks took unprecedented emergency action in an effort to contain the worst economic threat since the Great Depression.

Hours after the Government unveiled a £500 billion rescue package for the British banking system, the Bank of England joined forces with its counterparts across the Western world to cut rates by half a percentage point.

The extraordinary level of coordination was designed to demonstrate resolve in the face of financial panic but failed to restore confidence in the stock market. Share prices rallied briefly in London but the FTSE 100 index closed down 239 points at 4,367, its lowest point for four years.

In its bleakest forecast for years, the International Monetary Fund said that the world was entering a major downturn in the face of “the most dangerous shock . . . since the 1930s”. The US and Europe were either on the brink of or already in recession.

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The rescue is about saving capitalism, not replacing it with socialism

Peter Riddell

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The Chancellor’s plan to part-nationalise the worst-hit banks, guarantee some of their debts and flood them with fresh supplies of cash drew a mixed reaction. There were accusations that he was favouring bank shareholders over ordinary taxpayers and breaching fiscal rules.

The Government has earmarked up to £50 billion to inject into banks in return for preference shares and possibly ordinary shares. It has also offered to guarantee all short-term borrowings made by participating banks in the wholesale markets, a potential liability of £250 billion. A further £200 billion is being provided to money markets to allow banks to swap risky assets for Treasury bonds.

Robert Chote, of the Institute for Fiscal Studies, said that the package could push the Government’s debts towards 50 per cent of national income.

Banks welcomed the package. Royal Bank of Scotland and HBOS, which is to be taken over by Lloyds TSB, are expected to take part. Barclays, Standard Chartered and Nationwide were also named as being eligible. John Varley, the chief executive of Barclays, said: “The cost to the economy of allowing the banking system to freeze is a far more pervasive cost than the cost of this stabilisation programme.”

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