Quantitative Easing Explained
Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government’s own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.
1. The national bank declares an extremely low rate of interest, for example 0.5%.
2. The national bank credits its own bank account with money created from ‘thin air’, probably just by adding to a number on its computer.
3. The newly created money is then used for buying government bonds from financial firms such as banks, insurance companies and pension funds.