The aim of quantitative easing is to encourage spending, keeping inflation on track to meet the Government’s 2% inflation target.
Quantitative easing doesn’t involve literally printing more money. Instead, we electronically create new central bank reserves – the money that banks use to pay each other – and use this to pay for the assets we buy.
How does quantitative easing work?
When we buy gilts, it pushes up their price and so reduces the yield (the return) that investors make when they buy gilts. This encourages investors to buy other assets with higher yields instead, like corporate bonds and shares. As more of these assets are bought, their prices rise, pushing down borrowing costs for businesses, encouraging them to spend and invest more.
We also buy a smaller amount of corporate bonds, which makes it easier for companies to raise money which they can then invest in their business.
Additionally, when people who sell assets to us put the proceeds in their bank accounts, commercial banks have more money to lend out, again reducing the cost of borrowing money and encouraging people to spend and invest.
Why was quantitative easing needed in the UK?
Raising and lowering Bank Rate is our main tool for controlling growth. The lower the interest rate, the more people are encouraged to spend rather than save. However, as we have cut interest rates close to zero, quantitative easing is another tool we can use to stimulate the economy when demand is too weak.
Who decides on quantitative easing in the UK?
The Bank of England’s Monetary Policy Committee
(MPC), chaired by the Governor of the Bank of England, decides on QE in the UK. The MPC meets throughout the year to set monetary policy – the Bank Rate and amount of quantitative easing – in order to deliver the Government’s 2% inflation target.