The Three-Hundred-Year Low

• Author: André Meier/Simon Willson
• Position: International Monetary Fund
• Pages: 30-31

Page 30

The Bank of England’s policy rate is the lowest ever

Never—in more than three hundred years of combating the effects of investment bubbles, global depressions, and world wars—has the venerable Bank of England (BoE) lent money this cheaply. The current global recession has accomplished what no previous business cycle since the start of the Industrial Revolution ever achieved: it has led the U.K. central bank to lower its base rate to virtually zero. What’s more, the Old Lady of Threadneedle Street (the BoE’s affectionate sobriquet) has decided to move beyond interest rate cuts, adopting unconventional policies to try to restart the U.K. economy.

When the effects of the global financial crisis that began in the United States started hitting the U.K. economy in 2008, the BoE first reacted with the tried and trusted strategy of reducing official interest rates to make loans cheaper and thus keep companies and individuals borrowing and spending. The central bank cut its official bank rate, the rate of interest at which it lends to banks, from 5.5 percent at the start of 2008 to 2 percent at year-end.

As the chart shows, the five cuts in 2008 alone dropped the BoE’s bank rate to record-equaling lows last seen during banking crises in the 1880s and 1890s, and after the Great Depression and World War II in the 1930s and 1940s. Yet even an interest rate of 2 percent was not judged low enough this time to restart the economy and prevent inflation from undershooting the official target.

Leading indicators of economic activity continued to plunge, amid falling stock prices and bad news from the country’s banking system. So the BoE cut the bank rate to 0.5 percent by early March 2009. And it reached for Plan B: if no one else was going to buy in this depressed environment, the Old Lady would. In a move that continues to test the boundaries of conventional central banking, the BoE started buying financial assets, primarily government bonds, in March 2009.

As good as gold

Among the key central bank functions assigned to the BoE in the 19th century was that of monopoly issuer of bank notes, which began with the Bank Charter Act of 1844. The Act also set the stage for almost a century of the gold standard by stipulating that BoE bank notes had to be backed by gold.

The BoE assumed a further central banking role in the mid-to late 1800s by becoming...