Polish Financial Times 
Wednesday, Dec 24, 2008
A quiet revolution in central banking is gathering speed, as the Federal Reserve ploughs ever deeper into the brave new world of unorthodox monetary policy and other central banks ponder how far they might have to follow.
The world’s central banks have already undergone dramatic changes since the start of the credit crisis more than a year ago. They have cut interest rates with unprecedented rapidity – in some cases to historic lows – and have increased bank reserves massively to meet heightened private sector demand for liquidity.
They have become de facto central counterparties in the money markets, and in some cases even direct lenders to companies. Moreover, by making liquidity available against collateral on terms far more favourable than those that prevail in the private markets, they have become in effect catastrophic risk insurers of last resort for whole classes of financial assets – taking on the risk that the crisis could become so bad that they cannot recoup their loans.
But the latest steps by the Federal Reserve – which cut interest rates virtually to zero last week and said it would create money to finance ever-larger credit operations – break new ground.
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Already the Fed arguably has one companion, the Bank of Japan. The BoJ cut rates to nearly zero on Friday, stepped up its purchases of government bonds and said it would buy commercial paper.
When central banks want to stimulate a slowing economy they normally cut interest rates. But when rates approach zero other tactics must be employed.
Like the Fed, the BoJ is likely to end up funding these purchases by expanding its holdings of bank reserves and therefore the narrowest measure of the money supply. Unlike the Fed, it has the option of issuing its own debt instead.
The Bank of England, while cautioning against assuming that it will follow the Fed into unorthodox territory, is thinking about what it might do in certain circumstances if UK interest rates also fell towards zero.