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What is quantitative easing?

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    What is quantitative easing?

    Quantitative easing is a tool that central banks, like the Bank of England, can use to inject money directly into the economy.

    Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money.  We then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE’ or ‘asset purchases’ – these are the same thing.

    The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.

    Why do we need quantitative easing?

    The Bank of England is tasked with keeping inflation – rises in the prices of goods and services – low and stable.

    The normal way we meet our inflation target is by changing Bank Rate, a key interest rate in the economy.

    When the global recession took hold in late 2008, we quickly lowered Bank Rate from 5% to 0.5% to support the UK’s economic recovery. Lower interest rates mean it’s cheaper for households and businesses to borrow money – which encourages them to spend and invest, whether that’s a family buying a new car or a company that wants to build a new factory.

    But there is a limit to how low interest rates can go. So when we needed to act to boost the economy, we turned to another method of doing so: we introduced quantitative easing.

    How does quantitative easing work?

    Large-scale purchases of government bonds lower the interest rates or ‘yields’ on those bonds (this site explains more about bond yields). And this pushes down on the interest rates offered on loans (eg mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy.

    So QE works by making it cheaper for households and businesses to borrow money – encouraging spending.

    In addition, QE can stimulate the economy by boosting a wide range of financial asset prices.

    Suppose the Bank of England buys £1 million of government bonds from a pension fund. In place of the bonds, the pension fund now has £1 million in money. Rather than hold on to this money, it might invest it in financial assets, such as shares, that give it a higher return. And when demand for financial assets is high, with more people wanting to buy them, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity.

    How much quantitative easing have we done in the UK?

    Following the programme of QE announced in August 2016, purchases of government bonds will total £435 billion.

    Rounds of QE have been announced in response to the economic conditions at the time. This graphic shows how bond purchases have built up over the years:

    qe-bubbles-200bn
    qe-bubbles-375bn
    qe-bubbles-435bn

    9 comments

    1. Michael colwell
      25th February 2017

      So QE encourages businesses and households to borrow more money? Isn’t this what caused the banking crisis in 2007, aren’t encouraging exactly the same situation (bad debt and over stretched banks) as we had back then?

      1. Steven Blows
        1st March 2017

        Borrowing isn’t a bad thing. It means that people can get what they want and spend sooner. As long as they have good knowledge and budgeting they can afford the loan and no harm will be done. In fact good will come out it, because with more spending in the economy more people will be in jobs ultimately leading to economic growth. Since households are starting to spend less due to uncertainty upon leaving the EU the BOE needs to do something about it and encouraging borrowing and therefore spending does this. With the financial system now being regulated more efficiently and people starting to become more financially literate people should be able to borrow without getting into another financial crisis. On a side note the financial crisis was caused by multiple variables one being a consumer society.

    2. Rowena Esp
      26th February 2017

      So, what good did this scam do for normal people? Absolutely nothing!
      Also, why is debt good for normal people? It isn’t!
      Is pushing up debt as a nation good for the economy? No!
      So what happens when interest rates go up to 5%? Normal people will lose their homes!
      This propaganda video is disgusting.
      Print money and give it to the poorest in society, they will put the lot straight back into the economy.
      Print money and give to the richest in society and they’ll put in in an off shore account and none of that cash joins the economy.
      Does anyone in the Bank of England have a brain cell? Or are you all yes men zombie freaks that just do as they’re told?

    3. Steve Fletcher
      26th February 2017

      When the government borrows the virtual money from the BoE, is the interest paid by virtual money also?
      And who benefits at the BoE?
      Who has shares in the BoE

    4. James
      27th February 2017

      It should be noted that the BoE admits that QE benefits the richest people in society far more than the poorest! There must be fairer ways to keep interest rates low.

    5. Neil
      27th February 2017

      And if the banks who you are protecting do not lend and still pay their staff BILLIONS in bonuses?

    6. Dominic
      27th February 2017

      Eminently readable and understandable. Would be good to know, however, what the downsides of QE are (lower interest rates on savings, for example).

    7. tim mercer
      16th March 2017

      when and how will QE be reversed?

      1. KnowledgeBankLeanne
        17th March 2017

        Thanks for your question Tim!

        There is currently no set date to end QE. Any decisions on this front would be for the Monetary Policy Committee (MPC) to decide.

        However, there is no agreement or understanding that those who have sold the assets to the Bank will repurchase them. When QE started, the Bank set up the Asset Purchase Facility (APF) to manage all purchases of gilts and bonds. When the MPC decides to reduce/close the APF, it will sell the gilts back into the economy, or wait for them to mature, which will leave a balance of zero in the APF. This will effectively remove the money from the economy, preventing high levels of inflation.

        Further information on decisions, minutes, and forecasts can be found here: http://www.bankofengland.co.uk/monetarypolicy/Pages/decisions.aspx

        I hope that answers your question, and thanks for visiting KnowledgeBank.

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