What is Quantitative Easing?

Online Stock Trading - What is Quantitative Easing?

Quantitative easing is a term that has been bandied about for a few months now, but what does it mean?

Quantitative easing is in fact a way of stimulating economic growth after interest rate cuts are no longer viable i.e. when interest rates are already at or close to zero, by printing more money, although not physically in the form of more bank notes.

Quantitative easing involves central banks flooding the economy with vast quantities of money in order to promote lending, this is achieved by expanding the balance sheet of the central bank electronically, so that the central bank in question will then buy high-quality investment grade assets, such as fixed-income sovereign debt, corporate bonds, 'asset-backed' securities based on property loans.

The Central Bank will at the same time sell fewer of its own gilts to institutions such as pension funds. These two measures are designed to free up extra liquidity. Banks get cash from the Central Bank in exchange, thus enablng them to build up their reserves in the hope and/or expectation that they will lend some of this cash to individuals and businesses.

According to monetarist theory, price levels and economic activity are a result of the amount of money available, multiplied by the speed at which this money moves through the economy. Banks have noticed that "money supply is not growing fast enough". So, quantitative easing, by increasing the quantity of cash available to commercial lenders – by buying assets from them that nobody else wants – will, it is believed, increase interbank lending and the movement of credit through the economy.

The US Fed, the European Central Bank, the Bank of England, the Bank of Japan, the Bak of Canada, the Bank of Israel, the Swiss National Bank and other central banks around the world are all currently or are about to engage in some form of quantitative easing.

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