Interest rates have been cut again - to a record low of 1.5 percent. As they get ever closer to zero, the impact of rate cuts will become more and more limited. So what can central banks do to ease the economic pain?

“Quantitative easing”, or what non-economists call “turning on the printing press” is one of the options.

Here is our guide to how it works and which countries have used it:

WHAT IS QUANTITATIVE EASING?
– Quantitative easing refers to ways of boosting economic growth after traditional monetary policy tools, such as interest rate targets, have been exhausted.
– Central banks flood the banking system with masses of money, more than is needed to keep official interest rates at zero or a low rate, to shore up financial systems and promote lending. They usually do this by buying up large quantities of assets from banks.

WHO HAS USED IT?
* JAPAN:
– The BOJ adopted quantitative easing, going beyond keeping interest rates at zero, in March 2001 after the economy was hit by the bursting dot-com bubble and remained stuck in a battle with deflation.
– Many experts, including some BOJ policymakers, were sceptical whether the policy had any direct effect in reviving the economy, but most agreed it helped limit deflation and avert a more serious banking crisis.
– The extra fund cushion meant banks, burdened with massive nonperforming loans, avoided a liquidity crunch and were able to take bolder steps in cleaning up their loan portfolios.
– Instead of a traditional policy of raising or cutting short-term rates, the BOJ set a target for the amount of money it force-fed into the banking system. The funds were injected mainly through the BOJ’s purchases of government and commercial securities from banks. The policy ended in 2006.

WHO IS USING IT?
* THE FED:
– Economists agree the U.S. Federal Reserve has adopted a form of quantitative easing in its efforts to stabilise the financial system and help the economy, though in a different way from what the BOJ conducted.
– The Fed cut the benchmark federal funds rate target to a range of zero to 0.25 percent, saying it would help markets and stimulate the economy by keeping its balance sheet at a high level.
– The Fed has committed to purchasing large amounts of mortgage-related debt to help the housing market, and it is considering outright purchases of government bonds.
– Since the bankruptcy of Lehman Brothers in September, the Fed’s array of measures to shore up the financial sector has already caused its balance sheet to more than double in size to a record level above $2 trillion.
– The Fed said that its dramatic policy action last week did not signal increased concern about deflation but a determination to improve lending conditions by lowering mortgage rates and other important financial rates.

WHO MAY USE IT?
* BOE:
– Bank of England policymaker David Blanchflower said last month that monetary policymakers would be right to consider using extraordinary measures, including quantitative easing, to boost the economy and prevent a deflationary spiral.

* BOJ:
– If the global recession deepens, the BOJ may return to quantitative easing early next year. Naoki Iizuka, senior economist at Mizuho Securities, said the BOJ could resort to cutting Japanese rates to zero as early as January to contain the slump. Some analysts see the central bank going even further by reverting to quantitative easing.
– Using this policy could be hard to swallow for BOJ Governor Masaaki Shirakawa who, as a central bank bureaucrat, was involved in crafting the policy and has warned that keeping rates too low would distort money market functions.
– Senior BOJ officials have said the bank was not ruling out any policy options as the economy, already in recession, faces the risk of suffering its longest contraction on record.
– Shirakawa told parliament last month quantitative easing had a certain effect in stabilising the financial system, adding that he was examining the effects and side-effects of the policy.
– Like the Fed, the BOJ is trying to target troubled markets that are affecting the economy, such as the commercial paper market in which companies raise short-term financing. The BOJ said last week it would buy commercial paper outright and would boost the amount of its monthly government bond purchases.

(Guide compiled by David Cutler and Jijo Jacob)

The year 2008 has been filled with unprecedented events and all-time lows, a financial system overhaul and global turmoil. Could the New Year herald positive re-evaluation and a positive turnaround? And in what has been a year of sleepless nights for many, will a nation steeped in debt start to curb excess?

Rate cuts figured high on the news agenda as banks undertook radical measures to stabilise the economy. Within the space of one week, Britain saw the lowest base rate since the mid-1950s, the ECB took its rate to a two-and-a-half year low, the U.S. Federal Reserve aggressively slashed rates and a 175 point reduction was made by Sweden’s central bank.

The key question remains – will governments run out of weapons to boost the economy in 2009?

Gazing into a crystal ball has never been quite this tricky, and perhaps the most accurate prediction from industry experts is that policymakers will likely find themselves strapped for more tools to combat the crisis.

To the average citizen, sophisticated financial gadgetry will not alleviate fears of rising unemployment levels and inflation worries. Borrowing costs for those whose home equity and other floating-rate loans are tied to the prime interest rate may have seen some relief from rate cuts, but the gain has been negligible for others.

Early this month, the IMF’s chief economist Olivier Blanchard opined that the host of government rescue measures may have brought global economies back from the brink of the worst financial catastrophe in more than 60 years, but did not remove it from the danger zone. Progress had been made, he conceded, but insisted it was “much too early to declare a victory.”

On November 6, the IMF cut its world growth projections to a mere 2.2 percent, emphasising the need for an immediate fiscal stimulus. “At this point, the goal should be fiscal boost of about 2 percent of global GDP,” said Blanchard. He remained optimistic that this would translate into a corresponding 2 percent increase in global growth.

Two weeks ago, Bank of England Deputy Governor Charles Bean said zero interest rates were a future possibility for Britain. Both the Fed and the Bank of Japan have adopted a near zero interest rate policy, with the former stating a willingness to keep rates low for an extended period.

It is worth noting however, that the co-ordinated round of rate cuts by central banks worldwide in October did not have the desired immediate impact on the state of the financial system.

Until market risk aversion eases, lowered interest rates may not impact the economy to the extent that governments would like. Additionally, as banks further their attempts to deleverage, we may very well see small bursts of stability, but a period of sustained growth seems unlikely to return in 2009.

In the interim however, we can certainly hope that some confidence is returned to both frazzled consumers and strained financial markets alike. And while extensive borrowing and emergency measures will increase countries’ debt, shoring up resources to prop up the global economy is set to be the overriding priority for a long time to come.

The Bank of England has cut interest rates by a whole point to 2 percent in response to increasing worries over discouraging data and a looming recession.

This week, the all-important services sector (which makes up three quarters of economic output) recorded its weakest headline index since 1996 and seventh straight month of contraction. Together with dismal news on unemployment and inflation, these surveys confirm that recession is spiralling as we reach the close of 2008.

So was the rate cut enough?

The consensus among economists polled by Reuters was indeed for a full point drop, bringing the base rate to the lowest in more than half a century after the big 1-1/2 point cut last month.

But several economists had pushed for a 1-1/2 point cut and some even thought the economic situation is dire enough to warrant zero percent.

Do you think the Bank should have been bolder?

(Please note this is an updated version of an earlier Have Your Say which asked readers how big a rate cut they thought the Bank of England should make. The announcement was made at mid-day GMT)

This is a guest blog by Melanie Bien, director of independent mortgage broker Savills Private Finance. The opinions expressed are her own:

The Bank of England’s decision to cut rates by 1.5 percentage points to 3 per cent - the lowest level in 54 years - is a huge surprise and everyone was caught on the hop by this drastic reduction.

While on one level it is welcome news, particularly for those on base-rate trackers who will feel the full benefit straightaway, it is worrying on another: how bad have things got to necessitate this dramatic reduction?

The next inflation report from the Bank of England will be interesting reading. The reduction will not be an overnight solution to the problems in the mortgage market. But it will start to have a positive effect on the interbank rate - the rate banks pay to borrow money.

These rates have been much higher than base rate: three-month Libor is around 5.7 per cent, for example, explaining why new mortgage rates have been slow to fall. It is unlikely that lenders will reduce their standard variable rates (SVRs) by the full amount but with such a big rate reduction there will be pressure on them to pass on at least some of it, particularly those who passed on nothing after October’s half-point cut.

Those coming up to remortgage will be in for a shock if they think new rates will be much cheaper. A number of lenders - Lloyds TSB, Northern Rock and Woolwich - have pulled their trackers and are set to launch more expensive replacements. Abbey has already priced its trackers 50 basis points higher in anticipation of this reduction in base rate.

Lenders who have cheap trackers are likely to be flooded with applications, which will affect service levels. One way of controlling this is by raising rates and lenders are adopting a herd mentality, copying each other so no-one is left exposed with market-leading rates. Fixed-rate mortgages have started edging down and will continue to do so.

But while rates are falling on some products, criteria are tight and this will take some time to improve. The best mortgage rates are still available to those able to put down at least a 25 per cent deposit or who have this level of equity in their homes. First-time buyers without financial assistance from their parents will continue to struggle to get on the housing ladder.

Praise for the Bank of England’s huge cut in interest rates to 3 from 4.5 percent has been widespread.

Economists say it was a bold and aggressive move and the government will now be looking for banks to pass on the reductions in full.

But was it enough? Some forecasters are looking for even more and suggest two or even zero percent could be on the way next year.

What is your opinion of the Bank’s decision?

Bank of England Governor Mervyn King has made his first public speech since the emergency bank recapitalisation programme and several newspapers commented on the change in demeanour of a man who once said his ambition as a central banker was to be boring.

The dramatic events over the past two months since the collapse of Lehman brothers have forced King into the spotlight — like it or not. Being boring is not an option now.

Speaking to businessmen in Leeds, King said the economy is probably entering its first recession in 16 years and that the outlook has not worsened as rapidly as it has in the past month for a very long time.

He called the financial crisis an “extraordinary, almost unimaginable, sequence of events” and added: “We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy to more normal conditions.”

The Daily Telegraph was impressed by the language. “Mervyn King certainly wasn’t pulling his punches in Leeds last night,” it said, adding that the chances of a “quickie” recession are slim.

The Guardian said markets may well interpret his speech as further support for the idea that interest rates could go below 4 percent.

“Why? Well one way to encourage money to flow around the system is to make its price cheaper,” the paper noted. “King, the man accused of being overly concerned about ‘moral hazard’ , suddenly sounds like an arch-pragmatist.”

The Independent called his speech characteristically eloquent but took the opportunity to criticise the bank recapitalisation scheme, of which, it said, King is an admirer, accusing it of being heavy-handed.

“In forcing the banks into much more dramatic capital-raising plans than anyone other than banking supervisors think necessary, the government has ridden roughshod over shareholder rights in a way that doesn’t bode well for the future of the UK economy,” it said.

No one else, the paper said, had followed the Treasury blueprint of part-nationalisation.

“Ignoring  property rights sends out a very bad message indeed about a country’s attractions as a place to do finance and business,” it added.

“The government’s overkill may well have saved the banking system from collapse but it has also helped to destroy confidence in the stock market.”

The Times, however, used the Leeds speech to attack King.

“Mr King’s tenure at Threadneedle Street has been far from boring. It has, however been inconspicuous — and that is an indictment of Mr King’s performance,” it said.

“In the credit crisis of 2007-08, Mr King has been hesitant where he has even been visible. His belated attempts at expounding the Bank’s role, notably in the rescue of Northern Rock, have conveyed querulousness at the perfomance of the government more than calmness in a near-perfect financial storm.”

It praised King for being early and right in realising that the UK’s deposit insurance scheme was inadequate to the scale of the banking crisis implied by Northern Rock’s failure.

“Yet the message during Mr King’s period of office has been too Delphic and muted,” it added. “In the bull market of the late 1990s, Alan Greenspan spoke of “irrational exuberance”. No such telling phrase has crossed the lips of Mr King. What we have learnt is that being boring is no excuse for being invisible. “

Bank of England policymakers have held rates steady at 5 percent for a fifth month running.

Inflation currently stands at more than double the central bank’s 2 percent target but any rise in rates to try to choke that off risks aggravating the overall economic slowdown caused by the credit crunch.

Firmly impaled on the horns of a dilemma, most of the the nine-member Monetary Policy Committee, including Bank Governor Mervyn King, thought no change was the best option, given the risks.

What would you have done?

Britain’s second-quarter GDP growth was precisely zero, reflecting the country’s weakest performance since the recession of the early 1990s.

With growth in the services and manufacturing sectors equalling the dismal figures of 2005 and interest rate futures rising, it’s a double whammy, hitting both our pockets and, some would say, our morale.

At the same time, inflation currently stands at more than twice the central bank’s 2 percent target, hampering the Bank of England’s ability to boost growth by bringing down interest rates.

Most analysts do expect it to cut rates and some predict a move before Christmas. Others say it will have to wait longer.

Do you think the Bank needs to act sooner to prevent a full-blown recession of two quarters of negative growth? Just how bad do you think the economic slowdown will be?

Battling with the twin evils of soaring inflation and weaker growth, the Bank of England has kept interest rates at 5 percent for the fourth month running.

With the risk of Britain possibly facing its first recession since the early 1990s, the MPC has clearly opted for caution.

But aren’t the prices of oil and other commodities starting to fall? Isn’t the greater risk towards sluggish growth?

Do you think the Bank is being too cautious and should have gone for a cut?

Here is a round-up of Tuesday’s headlines:

DAILY MAIL: Father of Four Taken to Court and Fined…Because he Overfilled his Wheelie-Bin by Just Four Inches

Bus driver Gareth Corkhill collected a conviction and a 210 pound fine after he declined to pay a council on-the-spot fine for leaving the lid of his wheelie bin ajar four inches. Story here.

THE TIMES: Judges Set to Deliver Fresh Blow on Terror

Gordon Brown was facing a new battle over key anti-terrorism laws this week with the High Court set to rule against powers to freeze suspects’ bank accounts, the paper said. Story here.

The Sun: Harry Meets His Hero

Prince Harry, who served in Afghanistan, is pictured smiling and relaxing with wounded soldiers recovering in the Forces rehab centre in Surrey. Story here.

The Independent: Can the Bank’s 50bn Pounds Save the Economy?

The newspaper’s Hamish McRae explains in a typical Independent comment-style front page that the Treasury and Bank of England’s line of credit may not be enough to keep the supply of mortgages flowing. Story here.

Daily Express: Miracle Surgery Lets the Blind See

The paper looks at how British doctors carried out pioneering surgery to restore the eyesight of two blind patients. Story here.

The Guardian: You’re Dragging Us to the Edge, Labour Rebels Warned

Gordon Brown moved to stop a potentially damaging backbench budget rebellion with a contrite address to Labour MPs and a promise to hold a review before the autumn on the impact of the abolition of the 10p tax rate. Story here.

The Financial Times: King Rules Out Return to Risky Mortgages

The paper quoted Bank of England governor Mervyn King insisting that the housing market will not see a return to the profligate mortgage lending practices of the past few years while he announced a massive operation to support liquidity in British banks. Story here.

Daily Mirror: Show Some Heart

Chancellor Alistair Darling was going to tell bank chiefs to go easy on families who fall behind with their mortgages, the paper said. Story here.