THE US Federal Reserve slashed interest rates to near zero per cent and sterling fell to a record low against the euro, hurting Irish exporters, yesterday as the global economic crisis took a major new twist and the Government announced radical steps to boost public finances by abandoning a commitment to the National Pensions Reserve Fund.
In a surprise move, the Federal Reserve cut rates to a new range of 0-0.25 per cent yesterday evening, down from 1 per cent, and said it would use "all available tools" to lift the US economy out of its year-long recession.
The rate cut, which was larger than expected, could present problems for the smooth operation of parts of the money markets that have technical difficulties operating near zero rates.
The Federal Reserve is bidding to ease intensifying fears that the US economy will be hit by deflation, as new figures showed the biggest monthly drop in US prices on record.
There are now increasing signs that the global economy is at risk of a debt-deflation spiral, in which the real value of debt increases.
It also coincided with a warning from US president-elect Barack Obama that his government would have to implement aggressive fiscal policies as the Fed ran out of room to reduce rates.
"We are running out of the traditional ammunition that's used in a recession, which is to lower interest rates. They're getting to be about as low as they can go."
European Central Bank (ECB) president Jean-Claude Trichet has signalled that euro zone interest rates may remain unchanged at the ECB's next meeting in January. But data showing that the euro zone has slipped further into recession may put pressure on the ECB to cut rates.
The Fed's move sent the dollar tumbling to a 10-week low against the euro, which continued to trade above the 90 pence level against sterling yesterday.
The Irish Exporters Association said the euro-sterling exchange rate threatened job losses and called on the Government to take immediate action to reduce exporters' dependency on trade with the UK as part of its economic recovery plan.
Meanwhile, the Government is to abandon a commitment to pay €1.6 billion into the country's National Pensions Reserve Fund in a bid to cut down on State borrowing next year, Taoiseach Brian Cowen revealed. In the Dáil, Mr Cowen said the fund's founding legislation, which has to be amended to allow it to invest in the banks, will also be changed to drop the obligation to invest 1 per cent of gross national wealth annually. His declaration came minutes after the Green Party had proposed that the Government should scrap making the payments.