In early March, the Bank of  8  BIS Review 41/2009  England cut its policy rate to 0.5 per cent and is thus also close to zero. Many other central banks, including the Riksbank, have also reduced their policy rate to all-time low levels. When the central banks' traditional tools for influencing demand in the economy can no longer be used – when no further cuts in the policy rate are possible – then other options have to be found. In both the USA and the UK, as in some other countries, the central banks have begun to conduct monetary policy using unusual, and in some case untested, methods. It may be worth pointing out, however, that there may be good reasons for implementing a lot of what the central banks have done irrespective of whether the policy rate is close to zero or not. This relates to various measures that aim to improve the functioning of the financial markets and ease the supply of credit. One way of trying to illustrate the course of events is to study the central banks' balance sheets. The exact form of these balance sheets varies from country to country, but they have a number of common features. For the sake of simplicity, and without claiming to present an exact picture of reality, allow me to assume a stylised balance sheet. On the asset side there are foreign and domestic assets and the lending to the banks.
It can be said, in simple terms, that the application of quantitative easing entails a focus on the liability side of the balance sheet, while the state of the asset side becomes less important even though this is also reflected in the balance sheet. The express purpose of this shift from price to quantity is usually that "the price" can no longer be affected as the policy rate is zero. It could therefore be said that quantitative easing is a type of monetary policy that is more directly dedicated to dealing with a zero interest rate than credit easing. The latter focuses more directly on reducing the spreads and improving the supply of credit in the economy. It should be emphasised, however, that a zero interest rate is not necessarily a precondition for either quantitative easing or credit easing and it may sometimes be possible to find a use for both methods even when the policy rate is positive. The measures that the Bank of England began to implement at the beginning of March can be characterised as quantitative easing. In its communication, the Bank of England has  12  BIS Review 41/2009  talked about injecting money directly into the economy. This is done by buying government securities and, to a certain extent, securities issued by private players, for example corporate bonds. The latter implies that the strategy also includes elements of credit easing in the sense that the supply of credit to companies is eased.