Quantitative Easing

Quantitative easing is a policy in which a central bank buys assets such as government bonds in bulk to push money into the economy. Normally it would cut the policy rate to stimulate growth, so easing is the next card played when rates are already near zero and cannot fall further.

The mechanics: when the central bank buys bonds held by banks, the payment lands in the banking system and the money available to lend expands. At the same time, that buying lifts bond prices and pushes long-term yields down. If the policy rate steers short-term borrowing costs, easing is the tool that reaches the long end as well.

The effects were real. During the 2008 financial crisis and the 2020 pandemic, major central banks used easing to unfreeze funding markets and caught a financial system that was falling. Lower long-term yields eased corporate investment costs and household debt burdens.

There is a price. The money released flows not only into real spending but into stocks and property, lifting asset prices and drawing criticism for widening the gap between those who own assets and those who do not. Sustained too long it can feed inflation, which means eventually reversing course through quantitative tightening. Sharp turbulence in asset markets during that transition has been a recurring scene in recent years.