A slew of sharp interest rate cuts on Thursday showed the world's central banks have redoubled their willingness to ease policy as far as it takes in their ongoing battle with the worst financial crisis in 80 years.
Some were raising rates only months ago but have undergone a rapid conversion as the global financial crisis worsened.
The Bank of England cut rates by a full point on Thursday to follow last month's shock 1.5 point reduction. Sweden reduced rates by a stunning 1.75 points and even the European Central Bank's more modest 75 basis points cut was its largest ever.
"The substantial easing we've seen around the world this week does suggest there's been a sea change in attitude among policymakers," said Sarah Hewin, senior economist at Standard Chartered Bank in London.
The only difference in strategy appears to be one of speed.
"The ECB's cutting of interest rates by 75 basis points … seems somewhat tame compared to the recent moves by a number of central banks," said Howard Archer at IHS Global Insight.
The Federal Reserve is expected to cut U.S. rates, which are already down at 1.0 percent, again later this month.
The Bank of Japan's key target rate at 0.3 percent is just a whisker away from zero, the point at which it held official rates a decade ago as it battled deflation.
Even fast-growing, though now slowing, China cut its key rate by 108 basis points last week, the biggest reduction in 11 years.
But the lesson from the ongoing financial crisis is that until banks start lending freely there will be little economic boost no matter how cheap the cost of money.
Sweden's Riksbank noted that interest rate cuts were not having the impact that they normally would and the Bank of England flagged its concern about the lack of available credit.
"The upshot is that there will be intensifying pressure on the BoE to cut rates even further and there is the very real risk that Bank Rate will actually end up at zero next year," said James Knightley at ING Global Economics.
QUANTITATIVE EASING?
If and when they get to zero, or near it, central bankers may refer back to Japan's "quantitative easing" during its deflationary mire — essentially flooding the economy with excess liquidity to kick start it.
"The Federal Reserve is openly talking about quantitative easing through outright purchases of Treasury securities and UK authorities may well have to consider such aggressive options if the credit crunch does not ease," Knightley said.
ECB President Jean-Claude Trichet, when asked about that policy, said: "If new decisions are needed we will take new decisions. I cannot say anything else at this stage."
Real interest rates — essentially the nominal rate minus the prevailing level of inflation — are already at zero or lower in many cases, although inflation is forecast to plunge worldwide henceforth as oil and commodity prices tumble.
New Zealand slashed its key rate to 5 percent on Thursday. Inflation there was most recently running at 5.1 percent.
British rates at 2.0 percent compare with a most recent inflation rate of 4.5 percent and the ECB rate of 2.5 percent compares with euro zone inflation of 2.1 percent in November.
Sweden kicked off Thursday's European round of rate cuts and declared its new 2.0 percent level should be the floor for the next year. Inflation there was 4.0 percent in October.
"Extraordinary times make for extraordinary decisions, and laggards can become front-runners in no time," Gilles Moec at Bank of America said of the Swedish cut. "Policy rates are now deeply negative in inflation-adjusted terms."
What is as startling as the levels is the speed with which some central banks have changed tack — an indication of just how badly they think the financial system has deteriorated since the collapse of U.S. bank Lehman Brothers in September.
The ECB raised rates in July and only three months ago the Riksbank fretted about inflation being too high and raised to 4.75 percent from 4.50.
UK rates at 2.0 percent are at their lowest since 1951. Earlier this year, they were held for months at 5.0 percent.
