What is quantitative easing? How central banks create money to support the economy
By SendPay Business · · 2 min read
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Quantitative easing, or QE, is when a central bank creates new money electronically and uses it to buy large amounts of bonds, mostly government bonds. It is used when cutting interest rates is not enough to support the economy, usually because rates are already close to zero.
How it works
- The central bank creates new reserves, which is money that exists only electronically.
- It uses them to buy bonds from investors such as pension funds and insurers.
- Buying so many bonds pushes their prices up and long-term interest rates down.
- Cheaper borrowing is meant to encourage spending and investment.
Where it has been used
The Bank of England began QE in March 2009 after the financial crisis and used it again during the pandemic. The US Federal Reserve, the European Central Bank and the Bank of Japan have all run large QE programmes.
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QE can lower borrowing costs and support asset prices such as shares and houses. Critics say it mainly helps people who already own assets, and that too much can add to inflation. It can also weaken a currency, because lower interest rates make it less attractive to hold.
Quantitative tightening
Quantitative tightening, or QT, is the reverse: the central bank lets its bonds mature without replacing them, or sells them, shrinking the money it created. Several central banks began QT from 2022 as inflation rose.
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This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. Other companies named in this guide are reference points only and are not affiliated with SendPay Business.