The Bank of England has cut interest rates to a record low.  The International Herald Tribune:

Britain's central bank reduced the rate to 1.5 percent, the lowest level since the creation of the central bank in 1694, and economists expect Britain to follow the United States in reducing the rate to close to zero by the second quarter of this year.

It is the Bank of England's fourth rate cut since October. The European Central Bank is expected by many economists to cut its benchmark rate, of 2.5 percent, next week.

Now that the BofE has taken monetary policy almost as far as it can, a BBC Q&A raises the issue of quantitative easing in this short Q&A.  

Quantitative easing become a hot topic in the States during the last quarter of 2008 as the Federal Reserve dropped interest rates to near zero.  And any discussion of quantitative easing compels economists to look east, Far East.  The Bank of Japan attempted to use quantitative easing at the beginning of this decade to jump start Japan's stagnant economy. Here's a good take from the Financial Times last month:

The good news for the US Federal Reserve as it starts trying to manage monetary policy with interest rates stuck near 0 per cent is that it is not the first big economy to tackle such a task.

The bad news is that the results of the pioneering experiment in “quantitative easing” as an alternative to interest rate manipulation, which was conducted by Japan from 2001 to 2006, remain deeply ambiguous. The Bank of Japan is far from a cheerleader for the policy, under which it poured stupendous sums of money into the banking system and committed to holding interest rates down to await a solid revival of consumer inflation.

By making the levels of reserves held by commercial banks the target of monetary policy rather than the cost of overnight funds, it was hoped that quantitative easing would succeed, where previous interest rate cuts had failed, and pull Japan out of a deflationary trough.

The Federal Reserve Bank of Cleveland put out a helpful short analysis of Japan's efforts.  Japan's GDP did rise during the policy (see chart), but the report's authors say the jury is still out on the policy overall. 

The connection between the quantitative easing policy and the macroeconomic recovery remains somewhat more flimsy. Most observers believe that because the quantitative easing policy aided the banking sector, economic activity at least did not deteriorate further. The pace of economic activity did pick up, with contributions from consumer spending and investment, but exports, which benefited from growth among Japan’s trading partners, spurred much of the improvement. Although deflation ended in 2006, along with the quantitative easing policy, it returned after a very short hiatus in 2007, and continued until the recent commodity price boom.

The Japanese experience suggests that when inflation and short–term interest rates approach zero, central banks should act aggressively, giving greater than normal weight to downside risks. Moreover, they should commit to an inflation target and clearly explain their actions in terms of that target.

Martin Wolf's always helpful Economists Forum at the FT had a good discussion on the topic: Quantitative Easing: Lessons from Japan, and the San Francisco Federal Reserve also had a useful study of Japan's policy, but this was back in 2006: Did Quantitative Easing by the Bank of Japan "Work"?