Quantitative easing: your questions answered

In most advanced economies, a key mandate of central banks is to maintain price stability. Usually, this manifests in a target for inflation (the pace at which the aggregate price level rises) at a rate which is judged to be low, stable and/or in line with the economy’s growth potential. In the UK, the Bank of England targets a 2% rate of inflation (on the Consumer Price Index measure).

Adjusting interest rates is the main method by which central banks manage demand to meet an inflation target. This became an issue during the 2008/9 financial crisis, when the sheer scale of the economic downturn led central banks across the world to cut rates close to zero. With traditional tools of stimulating activity thus exhausted, central banks turned to “quantitative easing” (QE) – purchasing financial assets through creating new bank reserves (popularly known as “printing money”). Prior to this, the use of quantitative easing was largely restricted to Japan, which first implemented it in 2001.

In the UK, the Bank of England (BoE) deployed quantitative easing extensively in 2009 and intermittently in the years following the financial crisis. It came back in vogue in 2020, when the BoE ramped up purchases of assets in response to the Covid crisis – dwarfing the scale of asset purchases undertaken in the decade prior. With activity having since normalised, the Bank recently turned its attention to unwinding its previous asset purchases (“quantitative tightening”). However, market volatility following the government’s fiscal announcements on 23^rd September may yet have implications for their plans to do so.

Quantitative easing can seem like an abstract and even esoteric policy tool, but there is now a decent body of evidence around its effectiveness, particularly around easing stress in financial markets. However, it has not been without controversy: for example, large-scale purchases of government bonds have led many to question whether central banks are simply backstopping government debt, raising questions over their political independence.

Download the FAQs to see our answers to widely-asked questions about quantitative easing: addressing the queries posed by CBI member companies over its operation, and looking at some of the accusations levied against it more recently:

• What is quantitative easing, and how does it work?
• Has quantitative easing actually worked in boosting economic conditions?
• By raising asset prices, does QE widen inequality?
• Does QE essentially fund government debt?

We also briefly look ahead to the future of QE as a policy tool, as central banks begin the process of unwinding their asset purchases.