World's central banks march towards zero rates

By Mike Peacock

LONDON (Reuters) - 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 rate target 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.