Quantitative Easing

A central bank uses quantitative easing (QE) to

increase the supply of money in the banking system
designed to encourage commercial banks to lend at
cheaper interest rates to small & medium sized
businesses. It is a form of expansionary monetary
policy and has been used as a technique to stimulate
aggregate demand at a time when nominal interest
rates have fallen to historically low levels.

QUANTITATIVE EASING [Link]/ECONOMICS

 WHAT IS QUANTITATIVE EASING?

• Quantitative easing (QE) is a monetary policy tool used by central banks to

stimulate the economy.
• The basic idea is that when the economy is sluggish, the central bank buys
assets like government bonds from commercial banks and other financial
institutions. The banks get cash in return for selling bonds.
• This increases the amount of money in the financial system and, in theory,
encourages banks to lend more and consumers and businesses to spend more.
• QE is a way of injecting money into the economy to stimulate growth.
• It has been used by many central banks around the world, including the US
Federal Reserve, the Bank of England, and the European Central Bank.

QUANTITATIVE EASING [Link]/ECONOMICS

 HOW DOES QUANTITATIVE EASING WORK?

• Central bank (such as the Bank of England) creates new money electronically to make
large purchases of assets (bonds) from the private sector
• Commercial banks then receive cash from BoE asset purchases, and this increases
their liquidity and might encourage them to lend out to customers which will help to
stimulate an increase in loan-financed capital investment
• Increased demand for government bonds increases the market price of bonds. Higher
bond price causes a fall in the yield on a bond (this is because there is an inverse
relationship between bond prices and yields). Lower bond yields / long term interest
rates may cause the currency to depreciate
• Those who have sold bonds may use the extra cash to buy assets with relatively higher
yields such as shares of listed businesses and corporate bonds

QUANTITATIVE EASING [Link]/ECONOMICS

 BROAD MONEY SUPPLY IN THE UK ECONOMY
3,150

Money supply is understood as the

2,950
entire stock of currency and other
liquid financial instruments
Money supply amounts outstanding in billion £S

circulating in the economy of the

2,750
country at the point in time. In the
United Kingdom, this measure
2,550
includes currency (notes and coin),
and funds in commercial bank
2,350 accounts. Banks create deposits
when they lend out to businesses
2,150 and households. QE has
contributed to a significant
1,950
increase in the UK’s money supply.
Jan 2010 Jul 2011 Jan 2013 Jul 2014 Jan 2016 Jul 2017 Jan 2019 Jul 2020

QUANTITATIVE EASING [Link]/ECONOMICS

 HOW CAN A CENTRAL BANK REDUCE MONEY SUPPLY?

• One way is by raising interest rates. This makes it more expensive for banks to
borrow money from the central bank, and in turn, they raise the interest rates
that they charge their customers. This makes it more expensive to borrow
money, so people and businesses are less likely to do so. A lower demand for
credit means that less new money is created by the banking system
• Another way is by the central bank selling government bonds through their
open market operations. This reduces the amount of money that commercial
banks have available to lend out.
• Finally, the central bank can require banks to hold more cash in reserve, which
also reduces the amount of money they have available to lend out.

QUANTITATIVE EASING [Link]/ECONOMICS

 WHAT ARE BANK RESERVE REQUIREMENTS?

• Commercial bank reserve requirements are rules set by the central bank that
require banks to hold a certain percentage of their deposits in reserve.
• The reserve requirement is the minimum amount of funds that banks must
keep on hand as cash or in deposits at the central bank.
• This ensures that banks have enough money to meet the demands of their
customers and helps to prevent bank runs.
• Reserve requirements can also be used as a tool to control the money supply.
• When the reserve requirement is increased, banks have less money available
to lend out, which slows down the economy.

QUANTITATIVE EASING [Link]/ECONOMICS

 DOES THE UK HAVE A BANK RESERVE REQUIREMENTS

• The United Kingdom does not currently have commercial bank reserve
requirements.
• In the UK, banks are required to meet a "liquidity coverage ratio," which is a
measure of how well a bank can withstand a short-term disruption to its ability
to meet its financial obligations.
• This is like a reserve requirement in that it sets a minimum level of funds that a
bank must have on hand, but it is calculated differently and is based on a
longer time frame.
• The liquidity coverage ratio was introduced in the UK in 2015 as part of a
package of measures to strengthen the resilience of the banking system.

QUANTITATIVE EASING [Link]/ECONOMICS

 WHAT IS QUANTITATIVE TIGHTENING?

• Quantitative tightening (QT) is the opposite of quantitative easing (QE).

• While QE increases the money supply by creating new money and using it to
purchase government bonds, QT decreases the money supply by the central
bank going into financial markets and selling government bonds.
• The goal of QT is to reduce the amount of money in circulation and to increase
market interest rates.
• This can help to slow down inflation and to correct imbalances in the economy,
such as an overheated housing market. QT can also reduce the amount of
credit available in the economy and can lead to a contraction in economic
activity.

QUANTITATIVE EASING [Link]/ECONOMICS

 GIVE ME TWO
Two roles of the Central Bank in the
United Kingdom

QUANTITATIVE EASING [Link]/ECONOMICS

 GIVE ME 2…
Two roles of the Central Bank in the United Kingdom

Operation of monetary policy – setting base interest

1 rates to meet the inflation target (2%). No direct
intervention in the exchange rate – the UK operates a
free floating currency

2 Lender of last resort to the financial system during a

liquidity crisis / credit crunch.

QUANTITATIVE EASING [Link]/ECONOMICS

 GIVE ME TWO
Two possible consequences for
financial markets of a large increase
in the size of quantitative easing (QE)
by the UK central bank.

QUANTITATIVE EASING [Link]/ECONOMICS

 GIVE ME 2…
Two possible consequences for financial markets of a large increase
in the size of quantitative easing (QE) by the UK central bank.
Lower interest rates: By purchasing large amounts of government

1 bonds, the central bank increases demand for these assets, which
pushes up their prices and reduces their yields. This can lead to a
fall in mortgage interest rates and corporate bond interest rates

Currency depreciation: Another effect of a large increase in QE by

2 the UK central bank might be a depreciation of the currency. QE

increases the money supply and some of this extra liquidity will
leave the UK economy – sterling is sold – causing the pound to fall

QUANTITATIVE EASING [Link]/ECONOMICS

1 Quantitative easing (QE) is a monetary policy tool that involves:

A Reducing interest rates to stimulate borrowing

B Increasing the money supply by purchasing financial assets

C Raising reserve requirements for commercial banks

D Controlling exchange rates through currency interventions

QUANTITATIVE EASING [Link]/ECONOMICS

1 Quantitative easing (QE) is a monetary policy tool that involves:

A Reducing interest rates to stimulate borrowing

B Increasing the money supply by purchasing financial assets

C Raising reserve requirements for commercial banks

D Controlling exchange rates through currency interventions

QUANTITATIVE EASING [Link]/ECONOMICS

 Which of the following assets is typically purchased by a central bank during
2 a quantitative easing programme?

A Corporate stocks

B Real estate properties

C Foreign currencies

D Government bonds and securities

QUANTITATIVE EASING [Link]/ECONOMICS

 Which of the following assets is typically purchased by a central bank during
2 a quantitative easing programme?

A Corporate stocks

B Real estate properties

C Foreign currencies

D Government bonds and securities

QUANTITATIVE EASING [Link]/ECONOMICS

 What is one potential side effect of an extended period of quantitative easing
3 (QE)?

A Higher long-term interest rates

B Reduced money supply and deflation

C Asset price bubbles and financial market distortions

D Increased exchange rates and stronger currency

QUANTITATIVE EASING [Link]/ECONOMICS

 What is one potential side effect of an extended period of quantitative easing
3 (QE)?

A Higher long-term interest rates

B Reduced money supply and deflation

C Asset price bubbles and financial market distortions

D Increased exchange rates and stronger currency

QUANTITATIVE EASING [Link]/ECONOMICS

 What is the general aim of quantitative easing in times of economic crisis or
4 recession?

To support economic recovery by providing liquidity and lowering borrowing

A costs

B To encourage higher interest rates and boost savings

C To reduce government spending and fiscal deficits

D To create deflationary pressures and reduce consumer spending

QUANTITATIVE EASING [Link]/ECONOMICS

 What is the general aim of quantitative easing in times of economic crisis or
4 recession?

To support economic recovery by providing liquidity and lowering

A borrowing costs

B To encourage higher interest rates and boost savings

C To reduce government spending and fiscal deficits

D To create deflationary pressures and reduce consumer spending

QUANTITATIVE EASING [Link]/ECONOMICS

 Why might quantitative easing (QE) lead to a depreciation of a country's
5 currency?

A QE increases interest rates, attracting foreign capital.

B QE reduces the money supply, making the currency more valuable.

C QE raises inflation, making the currency less attractive.

QE increases the money supply, lowering interest rates and reducing the
D currency's value.

QUANTITATIVE EASING [Link]/ECONOMICS

 Why might quantitative easing (QE) lead to a depreciation of a country's
5 currency?

A QE increases interest rates, attracting foreign capital.

B QE reduces the money supply, making the currency more valuable.

C QE raises inflation, making the currency less attractive.

QE increases the money supply, lowering interest rates and reducing

D the currency's value.

QUANTITATIVE EASING [Link]/ECONOMICS

 In recent years, several central banks around the world have implemented a
6 policy of quantitative easing (QE). All other things being equal, which one of the
following combinations A, B, C or D, is most likely to be the result of this policy?

Long-term
Bank Bond
interest
liquidity prices
rates
A Decrease Fall Rise
B Increase Fall Rise
C Decrease Rise Fall
D Increase Rise Fall

QUANTITATIVE EASING [Link]/ECONOMICS

 In recent years, several central banks around the world have implemented a
6 policy of quantitative easing (QE). All other things being equal, which one of the
following combinations A, B, C or D, is most likely to be the result of this policy?

Long-term
Bank Bond
interest
liquidity prices
rates
A Decrease Fall Rise
B Increase Fall Rise
C Decrease Rise Fall
D Increase Rise Fall

QUANTITATIVE EASING [Link]/ECONOMICS