On Tuesday the US Federal Reserve surprised markets and slashed interest rates by 0.75% to a range between zero and 0.25%.
One day later, the world’s 2nd largest economy saw rates get cut to 0.1% by the Bank of Japan.
This now means the world’s largest two economies have interest rates of virtually zero and the conventional method of stimulating the economy by lowering rate is no longer available.
Now unconventional methods will be needed such as Quantitative easing where the central banks add money or liquidity to the system by buying up assets such as debt securities or bonds.
Quantitative easing was used by the Bank of Japan between 2001 and 2006 after the fall out from the Japan Housing Bubble saw interest rates fall to near zero.
» Fed cuts rates to record low range of zero to 0.25% – Market Watch, 16th December 2008.
» US Fed drops rates to ‘zero to 0.25pc’ – The ABC, 17th December 2008.
» Japan slashes interest rates to 0.1% – The Guardian, 19th December 2008.