Quantitative easing (QE) is the injection of money into an economy by a central bank.
- Quantitative easing is used by central banks as a way to put money directly into an economy by purchasing longer term assets (usually bonds) from the open market.
- Central banks purchase these assets from banks and other financial institutions.
- Buying these assets creates new money in an economy which encourages spending and borrowing.
What is quantitative easing?
It is one way for a central bank to influence the performance of an economy. One of the key roles a central bank has is to oversee the monetary system for a country or economy. A way it does this is by controlling the supply or price of money, by setting interest rates. When interest rates are at 0, or near 0, central banks have to use an unconventional method to achieve the same results.
This unconventional method is called quantitative easing (QE), and its main purpose is to inject new money into an economy. To do this a central bank will buy government bonds and other securities from financial institutions and banks on the open market. This means the institutions and banks have more money, which they can lend to borrowers or invest themselves.
Low-interest rates together with banks possessing extra money means they are able to lend to borrowers more easily. An increase in borrowing will likely occur with new loans taken out due to low rates of interest. This increase in money supply stimulates the economy, as people borrow more, they spend more which is usually a positive for the economy.
What are the risks of quantitative easing?
There are many positives to quantitative easing from a central bank’s point of view. However, there are some risks associated with it as well, such as:
- Central banks have no control over what banks will do with their extra money. A bank could simply hold on to it. Central banks also cannot force borrowers to take out new loans.
- Currency devaluation can occur when surplus money enters an economy. As the quantity of money increases, its value can decrease.
- A country’s currency losing value can hit it hard, especially if it imports many goods as they become more expensive.
- It is possible for inflation to be created when more people start spending money and an economy’s currency is falling in value.
Where can I learn more?
For more information about quantitative easing, and other key financial concepts, check out our Invezz courses. To learn more about investing, our helpful courses will take you through everything you need to know:
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