Quantitative easing definition

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Quantitative easing (or QE, for short) is an economic monetary policy intended to lower interest rates and increase money supply. It saw an increase in profile and use after the 2008 financial crash and subsequent recession.

QE is usually used to stimulate an economy when conventional forms of monetary policy are no longer effective, for example when interest rates are at or near zero.

To engage in quantitative easing, a central bank will commit to buying a large amount of financial assets (usually in the form of bonds), either from the government or other private sector market participants like banks. In order to do this, the central bank will create more money and increase its balance sheet.

The theory behind QE is that flooding the market with money and lowering interest rates should encourage banks to lend, and in turn consumers and businesses to spend. As cash is a low-yielding asset, investors will look to purchase other assets such as equities or private sector debt to gain higher rates of return. Central banks undergoing QE have a delicate balancing act to maintain, though, as increasing money supply too rapidly can lead to untenable increases in inflation.

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