EXPLAINED

Quantitative easing

  • 21 November 2019
  • 1 minute

Quantitative easing (or QE) refers to the process by which central banks create new money. This is distributed to large retail and corporate banks to help them generate more loans and to fund their day-to-day activities. This was done at the start of the financial crisis when banks found it hard to borrow short-term cash (known as a credit crunch).

Central banks do this by buying bonds and other investments. As the bonds mature – as bond issuers pay back the amount initially borrowed – the central bank can use that money to buy more investments and keep the economy buoyant.

Boosting the amount of cash in the system means people have more money to spend which encourages economic growth. However a rapid increase in the amount of money in circulation can lead to rising prices if the number of goods and services available to buy hasn’t had time to increase at the same rate.

In the past, the Royal Mint would physically print new notes for the Bank of England to distribute into the economy. These days, less than 10% of what we think of as ‘money’ is physical cash. Most of it is simply a list of numbers held on computers. This includes electronic/card payments, direct salary transfers, and direct debit payments. This makes it easier for the Bank of England to create new money.

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