Q&A:What does the rate cut mean for the UK?

The US Federal Reserve surprised the markets on Thursday, slipping in a surprise 0.25% cut to the discount rate, to 5.5%. The move came after the Fed lopped 0.5% off interest rates, to 6%.

BBC News Online looks at the impact of the move on the UK and the prospects for UK interest rates.

Why has the Fed cut interest rates?

The Fed has cut interest rates because it is worried by a sharp slowdown in the US economy.

Since July, the rate of US economic growth has been cut in half, while consumers and businesses have become more pessimistic about the future. Stock markets have also fallen sharply on fears that the slowdown will hurt profits.

The Fed hopes by acting now it can prevent the slowdown turning into a recession.

Will the UK follow suit?

The deputy governor of the Bank of England, Mervyn King, has said that the Bank's Monetary Policy Committee would not necessarily follow the US example

"What matters to us is the outlook for the British economy. We set interest rates for the UK, not the US," he said.

However, there are widespread expectations in the markets that UK rates will come down eventually - and the Fed move will only increase the pressure.

The UK economy is expected to slow down, and inflationary pressures appear muted. At its last meeting, two out of the nine members of the MPC voted for a rate cut.

And if rates are coming down worldwide, the UK could cut rates without danger that the move would weaken sterling and thus boost inflation.

Many analysts expect a rate cut later in the year of at least 0.25%. But the Bank of England may want to wait until it sees the Christmas sales figures and the March budget before taking action.

Will the Fed move succeed?

Not necessarily. Turning around the US economy could be a big job, requiring a series of interest rate cuts, and possibly tax cuts as well.

The US economic slowdown comes after ten years of boom, during which both consumers and businesses borrowed to the hilt and reduced their savings.

There is a general recognition that the US boom was unsustainable and some adjustment was necessary.

But whether it turns into a hard landing and a fully-fledged recession will depend on the reaction of consumers and markets to the Fed's move.

How are stock markets affected?

The cut in interest rates has boosted stock markets around the world.

The London Stock Exchange rose sharply after the news.

The reason is that lower interest rates mean higher profits for companies, especially companies that have borrowed heavily, for example many UK telecoms companies.

The expectation that global interest rates will come down has also boosted the high-tech sector, whose fast-growing companies become more valuable in a low-interest rate climate.

And London shares are especially affected by what is happening in the US because so many UK companies have close links with the US economy, in which they have invested heavily in the last few years.

How would a prolonged US slowdown affect the UK?

If the Fed interest rate cuts do not succeed in reviving the US economy, the consequences for the UK could be serious.

As Sir Edward George, the governor of the Bank of England, said, "if America sneezes, the UK usually catches cold."

About 15% of UK exports go to the US, and a even larger share of UK company profits are derived from the activities of the companies they own in the US.

And a US slowdown could easily affect economies around the world, hurting the export prospects for UK manufacturers and services even more.