Rate cuts expected as governments try to calm markets

· Brown to meet French, Italian, German counterparts
· Demand for new regulations as US Fed slashes rates

• Patrick Wintour and Andrew Clark in New York
• The Guardian,
• Wednesday January 23 2008

Britain was pushing last night for an emergency meeting to calm financial markets as governments around the world tried to reassure nervous investors. Gordon Brown has convened Downing Street talks with his German, French and Italian counterparts to discuss banking regulation and ways to disclose banks' bad debts more quickly.

In an attempt to avoid a repetition of the current credit crisis, the prime minister will call for measures to improve transparency in the banking system, to coordinate national regulators, to review the role of credit rating agencies, and to strengthen the management of liquidity risks.

The move came after another frantic day of trading in global markets which prompted the US Federal Reserve to make an emergency cut in interest rates.

It also led Mervyn King, governor of the Bank of England, to warn last night that Britain faces its biggest economic challenges in more than a decade in the coming year and predict that economic activity could slow "quite sharply" in the short term.

In its biggest one-day reduction in rates for two decades, the Fed slashed the cost of borrowing by three-quarters of a percentage point to 3.5%. Its action followed a secret meeting on Monday night convened in response to a dramatic sell-off in European and Asian markets.

The intervention provided temporary relief for the markets, sending the FTSE 100 index up 161 points to close at 5,740, after an early fall of more than 200 points. But the turmoil continued in stock markets around the world on another day of extraordinary volatility:

· US shares fell 460 points in the first five minutes of trading yesterday after being closed for a holiday on Monday;

· Trading was halted in India and other markets as shares fell sharply. Hong Kong's Hang Seng fell 8.7%, bringing its total loss over two days to $321bn;

· Japan's Nikkei index suffered its biggest one-day fall in a decade;

· The Australian stock market experienced its worst ever one-day decline.

Brown may face a struggle in persuading European governments to adopt his proposals. The Northern Rock crisis has damaged the credibility of Britain's light-touch approach to regulation, after images of queues building up outside the stricken lender were seen round the world.

Ministers offered reassurance that the UK economy can withstand global turbulence but there were more signs of financial misery in the US. The international gloom has been prompted, in part, by concerns that a $150bn package of tax cuts outlined by George Bush on Friday would be insufficient to avert a US recession.

The Fed's rate cut came a week before its scheduled rate-setting meeting, a sign that it saw the situation as unusually serious. In a statement the central bank cited "a weakening of the economic outlook and increasing downside risks to growth".

Henry Paulson, the US Treasury secretary, welcomed the move: "I think it shows this country and the rest of the world that our central bank is nimble and can move quickly in response to market conditions."

Economists have criticised the Fed's chairman, Ben Bernanke, for failing to take decisive action earlier, since defaults in America's mortgage industry have been reverberating since the summer.

"Right now it's 50-50 whether you're going to have a recession in America," said John Silvia, chief economist at the US bank Wachovia. "In the first quarter, growth will be negative and the Fed is struggling to keep it in positive territory for the second quarter."

Defaults on so-called sub-prime mortgages in America kicked off the crisis, causing a slowdown in consumer spending and huge write-offs of liabilities by big Wall Street institutions.

The Fed's cut will increase pressure on the Bank of England to follow up December's quarter-point cut in interest rates with further action. Analysts suggest that there could be a sharper cut in rates at the monetary policy committee's February meeting. But the former treasury minister Ed Balls, a close Brown ally, said Britain's already low interest rates and low inflation would provide insulation against problems elsewhere in the world.

Alistair Darling, the chancellor, said on Monday evening that times were "very difficult and turbulent". The Treasury pointed out that Britain is forecast to be the fastest growing economy in the G7 this year.

But Brown's move to call the No 10 meeting runs the risk of backfiring. Britain initially offended the Italians and the European commission by envisaging the event as a discussion between France, Germany and the UK. The meeting is intended to signal that the EU economy remains sound.

The Dow Jones yesterday opened with a 460 point drop. But by the close it had pared back its losses and was down by 128 points to 11,971.