rise relative to the overnight rate, and premiums for credit risk also rise. reductions in the overnight rate targeted by central banks, therefore, may not flow through to the same extent as usual to interest rates charged on loans ; and • third, if banks become capital constrained, their willingness and capacity to lend at any interest rate will be diminished. as you know, over the past year, many countries have found that the normal monetary transmission mechanism has become less effective. interest rates as i noted, many central banks have responded to this by reducing official interest rates to abnormally low levels, in some cases close to zero. most of this has happened since september last year. up until then, monetary policy settings around the globe had been following a relatively normal path, guided mainly by inflationary pressures. global monetary policy entered a tightening phase around 2004 and the majority of central banks continued to tighten policy into 2008. of the 35 largest countries or monetary areas, 23 had higher interest rates at september 2008 than at the start of the year, seven had unchanged rates and five had lower rates ( see table 1 ). this is not surprising because global inflationary pressures were still rising in the middle of 2008. commodity markets did not peak until july 2008, and indicators of pressure on global capacity – such as prices charged on shipping contracts – were at extreme levels. table 1 : changes in monetary policy change from 1 jan change from 1 sep level to sep 08 08 to present current ( basis points ) ( basis points ) ( per cent ) developed markets united states ↓ ↓ 0. 125 euro area ↑ ↓ 1. 00 ↓ 0. 10 japan united kingdom ↓ ↓ 0. 50 canada ↓ ↓ 0. 25 australia ↑ ↓ 3. 00 sweden ↑ ↓ 0. 50 ↓ 0. 25 switzerland norway ↑ ↓ 1. 50 denmark ↑ ↓ 1. 65 new zealand ↓ ↓ 2. 50 ↓ 5. 31 emerging asia china south korea ↑ ↓ 2. 00 india ↑ ↓ 4. 75 taiwan ↑ ↓ 1. 25 indonesia ↑ ↓ 7. 25 thailand ↑ ↓ 1. 25 hong kong ↓ ↓ 0. 50 ↓ 2. 00 ↑ ↑ 14. 00 ↑ ↓ 4. 50 ↑ ↑ 12. 00 turkey ↑ ↓ 9. 25 poland ↑ ↓ 3. 75 ↓ 1. 50 ↑ ↓ 9. 50 brazil ↑ ↓ 10. 25 mexico ↑ ↓ 5. 25 chile ↑ ↓ 1. 25 colombia ↑ ↓ 6. 00 peru ↑ ↓ 4. 00 malaysia pakistan * philippines emerging europe russia * * czech republic

romania latin america other saudi arabia south africa ↑ israel iceland * * * ↑ ↓ 2. 00 ↓ 8. 50 ↓ 0. 05 ↓ 13. 00 sources : bloomberg ; central banks * after raising its policy rate by 200 basis points in november 2008, pakistan's central bank lowered its policy rate by 100 basis points in april 2009. * * russia's central bank increased its policy rate by a cumulative 200 basis points during november 2008 in moves aimed at stemming capital outflows and mitigating the downward pressure on the ruble. * * * after initially lowering rates by 350 basis points in mid october 2008, the icelandic central bank increased its policy rate by 600 basis points two weeks later as part of the conditions of the imf's rescue package. subsequent easings have amounted to 500 basis points. the unusual period of monetary policy began in september 2008, after the failure of lehman brothers dramatically escalated the financial crisis. this in turn led to a collapse of household and business confidence around the world. official interest rates have since been cut very sharply across virtually all countries due to the highly synchronised nature of the current economic cycle. the average reduction in interest rates has been 330 basis points in the developed economies and about 300 basis points in emerging economies. among the developed economies, only four – australia, new zealand, denmark and norway – still have official interest rates above 1 per cent. official interest rates have never been this low in the developed world in the 150 - year period for which we have data ( graph 1 ). graph 1 the reason why official interest rates have been reduced to such extreme levels is that frictions in markets had made interest rates on loans to households and businesses less responsive to cuts in official rates. in the case of the us, for example, even though the fed had reduced official rates by 325 basis points by september 2008, the standard mortgage rate had hardly changed ( graph 2 ). bigger cuts in official rates were therefore needed in order to bring about a given fall in interest rates on loans. graph 2 table 2 : mortgage rates on new housing loans * predominant mortgage type current rate 10 - year average rate deviation from average australia standard variable 5. 16 6. 85 - 1. 70 united states 30 - year fixed 4. 63 6. 42 - 1. 79 canada 5 - year fixed 3. 89 5. 65 - 1. 76 united kingdom standard variable 3. 83 6. 5 - 2. 67 united kingdom 3 - year fixed 4.