Quantitative easing (QE) explained

During the financial crisis some central banks, in addition to reducing the bank rate, decided to inject money directly into the economy in order to meet the inflation target. The instrument of monetary policy shifted towards the quantity of money provided rather than its price (bank rate). But the objective of policy is unchanged – to meet the inflation target. Influencing the quantity of money directly is essentially a different means of reaching the same end.

Significant reductions in the bank rate have provided a large stimulus to the economy but as the bank rate approaches zero, further reductions are likely to be less effective in terms of the impact on market interest rates, demand and inflation. And interest rates cannot be less than zero. The central bank therefore needs to provide further stimulus to support demand in the wider economy. If spending on goods and services is too low, inflation will fall below its target.

The central bank boosts the supply of money by purchasing assets like government and corporate bonds – a policy often known as “quantitative easing”. Instead of lowering the bank rate to increase the amount of money in the economy, the central bank supplies extra money directly. This does not involve printing more banknotes. Instead the central bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy to bring future inflation back to the target.

In addition, at the behest of the world leaders at the G8 Summit, the IMF increased the amount each country has in so-called Special Drawing Rights (SDR) by $250bn. This is effectively global quantitative easing.

The Financial Times interactive feature explains how quantitative easing works and how this policy may stimulate the economy.