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What other options does the Bank have?

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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.

Was one point enough?

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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.

Pain not over yet after Bank of England rate cut

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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.

Should rates go even further down?

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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.

No time to be boring for BoE’s King

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mervynking.jpgBank 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.

Moneyspeak: Of donkeys and carrots and shock and awe

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sadtrader.jpgHere are just a few of the memorable quotes to emerge from the credit crisis:

If you would like to contribute please send us your own selection in the comments box below, with a link to where you found the quotes.

PRAISE FROM THIS YEAR’S NOBEL ECONOMIC PRIZE WINNER

“The British government went straight to the heart of the problem and moved to address it with stunning speed. Has Gordon Brown saved the world financial system?” – Paul Krugman.

Is the rates decision a good move?

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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.BoE

Where is the economy headed?

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bank.jpgBritain’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.

Two sides to sterling’s tumble

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pound-coins-toby-melville.jpgSterling has extended its losses against the dollar to its lowest level in more than two years , trading just above $1.85. As recently as mid-July one pound would buy two dollars and there were plenty of tales of holidaymakers rushing to the United States to make the most of it.

It’s not hard to see why sterling is under pressure, even though inflation is currently well above target and the highest in years: rising unemployment, falling house prices, large trade and budget deficits, and slowing economic growth.

Has the Bank been too cautious?

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rtx71g6.jpgBattling 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.

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