What is quantitative easing?
Quantitative easing is when a central bank like the Bank of England creates new money electronically to make large purchases of assets. We make these purchases from the private sector, for example from pension funds, high-street banks and non-financial firms. Most of these assets are government bonds (also known as gilts). The market for government bonds is large, so we can buy large quantities of them fairly quickly.
The purchases are of such a scale that they push up the price of assets, lowering the yields (the return) on them. This encourages those selling these assets to us to use the money they received from the sale to buy assets with a higher yield instead, like company shares and bonds.
As more of these other assets are bought, their prices rise because of the increased demand. This pushes down on yields in general. The companies that have issued these bonds or shares benefit from cheaper borrowing because of these lower yields, encouraging them to spend and invest more.
We also buy a smaller amount of private debt like corporate bonds. This is aimed at making it easier for companies to raise money in capital markets to invest in their business.
Those selling assets to us have more money in their bank accounts as a result. Commercial banks can use these new funds to finance new loans, encouraging more spending and investment.
If inflation looks like it is becoming too high, we can then sell the assets we’ve purchased through quantitative easing to reduce the amount of money and spending in the economy.
