Reuters: Extreme market turmoil is forcing a marked shift in central bank policy, pushing the lenders of last resort to go places they would rather not.
Finance ministers and central bankers of the G7 held emergency talks over the weekend. While they pledged to take action in the currency market to tackle disorderly movements if necessary, there was no other mention of joint action.
But it is clear the threat of a new systemic crisis has forced a change of tack, at least in the United States and Europe, where policymakers are again considering extraordinary measures four years after the onset of the global credit crunch.
The G7 finance ministers and central bankers, who held their talks after a downgrade of U.S. debt on Friday, vowed to "take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence".
Coordinated, or piecemeal, central banks have responded.
Despite protests from Germany's Bundesbank, the European Central Bank reactivated its bond-buying programme after the G7 call and expanded it to purchase sovereign debt issued by Italy and Spain, which markets were pushing to destruction.
The U.S. Federal Reserve on Tuesday took the unprecedented step of promising to keep interest rates near zero for at least two more years and said it would consider further steps to help growth, presumably code for printing more money.
The Bank of England was not far behind. Its latest forecasts on Wednesday suggested rates will remain at a record low 0.5 percent this year and next and it too did not rule out more quantitative easing despite inflation way above target.
"We're not out of tools; if we need to we can carry out more asset purchases ... The committee will have to decide if it wants to do that and if so, when," BoE Governor Mervyn King told a news conference.
The shift in policy has had repercussions around the globe, not least in Switzerland, where the franc hit yet another record high as investors sought sanctuary in the Swiss currency.
In response, the Swiss National Bank said it would significantly boost Swiss franc supply and conduct swap transactions to counter the currency appreciation, though it stopped short of direct intervention.
It has already cut rates, effectively to zero, despite a strong economy because of its soaraway currency.
"I think the bottom line from this is that we are on low interest rates for the long haul globally, certainly in the western world," said RBS economist Jacques Cailloux.
The Fed's decision to keep rates on hold has also limited the room for manoeuvre at the ECB, which is fast running out of reasons to pursue its course of raising interest rates.
Markets have priced out any further interest rate rise from the ECB, which began a tightening cycle in April, until well into next year.
"The ECB's not in a position to continue raising rates alone when you've got the biggest central bank in the world that has just announced they are on hold for the next two years, because of the implications that could have for the exchange rate," Cailloux said.
Even Norway, awash with oil money and growing strongly, desisted from an expected rate rise on Wednesday, squarely highlighting the latest global ructions.
"The decision must especially be seen against the background of the recent flare-up in financial market turbulence and clear signs of weaker growth internationally," Norges Banks Governor Oeystein Olsen said in a statement.
The burning question is, will it work, given systemic crisis, or at least many years of slow growth, is back on the agenda?
Reuters polls put the chances of the Fed pumping more new money into the economy at 37.5 percent, with the likelihood of the BoE doing the same at 30 percent.
Critics say more of the same medicine will do little good and some policymakers are demanding governments act now to cut bloated debts, even if there is an impact on growth.
"The imbalances in the world economy are still not being properly tackled and the burden of debt is still there," King said. "I think that the European Central Bank has gone to the outer limit of what a central bank can do and it's quite clear ... any further action really has to be carried out by European governments themselves."
Either way, the admission from the Fed, ECB and BoE that times are still extremely tough, may do little to calm stock markets, which plunged 20 percent from a May high before stabilising.
"Low interest rates support equity markets, but it is just a relief rally. There are too many uncertainties out there," Louise Cooper, markets analyst at BGC Partners, said.
If imbalances persist, the Swiss can forget any thoughts of a weaker currency too. "With or without intervention the franc remains the safe haven of choice for FX investors," said Tony Nyman of Informa Global Markets.
The ECB's reactivation and expansion of its bond-purchase plan has caused consternation in Germany, where there is a widespread belief central bankers should focus on fighting inflation and a fear that bond-buying will let errant governments off the hook. Many point the finger at the slow policy response from euro zone leaders, who have spent much of this year focusing on designing bailout instruments to take effect in 2013, rather than dealing with immediate -- and escalating -- problems.
"The fundamental problem is that politicians have wasted time in the last 18 months. If they had proceeded more courageously, it would not have been necessary for the ECB to bear the whole burden of stabilisation," said Peter Bofinger, professor at Wuerzburg University and an economic adviser to the German government.
Looking to Asia for help is unlikely to help.
China is still nursing a hangover from its 2008 stimulus spending spree and may be reluctant to kick off another big round, leaving less potent options on the table should the global economy wobble again.
And in Japan, the central bank stresses that the Fed's commitment on near-zero rates is similar to what the BOJ already has in place.
"We pledged to keep interest rates effectively at zero until price stability can be foreseen," Bank of Japan Governor Masaaki Shirakawa told parliament on Wednesday.