What is quantitative easing?

Why do we use quantitative easing?

It’s our job to keep the prices of things you buy low and stable, as this helps to support people’s jobs and incomes.

Rising prices is called inflation and the UK government has set us an inflation target.

To keep inflation on target we usually change a key interest rate in the economy (called Bank Rate). Changes in Bank Rate feed through to how much interest you get on savings, and how much interest you pay on a loan. That affects the amount of spending in the economy and so helps inflation to either fall or rise.

But things changed during the global financial crisis that began in 2008. At that time, we quickly reduced Bank Rate from 5% to 0.5% to help the UK economy recover.

Even with Bank Rate that low, we needed to do more to boost the economy and meet our inflation target. That’s where quantitative easing comes in.

How does quantitative easing work?

Quantitative easing (or QE) acts in a similar way to cuts in Bank Rate. It lowers the interest rates on savings and loans. And that stimulates spending in the economy.

Here’s how QE works:

We buy UK government bonds or corporate bonds from other financial companies and pension funds.

When we do this, the price of these bonds tend to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down.

The lower interest rate on UK government and corporate bonds then feeds through to lower interest rates on loans for households and businesses. That helps to boost spending in the economy and keep inflation at target.

QE also effects the prices of other assets like shares and property.

Here’s an example. Say we buy £1 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £1 million in cash.

Rather than hold on to that cash, it will normally invest it in other financial assets, such as shares, that give it a higher return.

In turn, that tends to push up on the value of shares, making households and businesses holding those shares wealthier. That makes them likely to spend more, boosting economic activity.

How much quantitative easing have we done in the UK?

To date we have bought £895 billion worth of bonds through QE. Most of that sum (£875 billion) has been used to buy UK government bonds. A much smaller part (£20 billion) has been used to buy UK corporate bonds.

We began buying bonds through QE in March 2009 as a response to the global financial crisis. The chart below show how our purchases of bonds has built up over the years. The last increase we made was in November 2020.