Quantitative easing

QE is one of the most powerful weapons in a central bank’s armoury – but it can also one of the most unconventional. Since the financial crisis broke out in 2007/8, the term ‘QE’ has entered popular terminology. Essentially, QE involves the purchase by a central bank of financial assets from banks and other financial institutions in order to stimulate an economy by injecting money (liquidity) into the economy. Such action is generally only undertaken when conventional monetary policy mechanisms (principally reducing interest rates by intervention in short-term government bond markets) have been unsuccessful. While QE in the US, Japan and more recently in Europe has been carried out on a massive scale, it has failed to create growth (though it may have averted a depression). In the popular mind, QE means ‘printing money’, but central bankers argue that printing money would involve the direct purchase of newly issued government bonds, an action known as ‘monetising the deficit’. Taken too far, such action by the central bank is likely to be inflationary in the long run. In fact, the line between normal central bank activity, QE and printing money is imprecise and investors clearly need to be very vigilant in watching that one does not shade into another. See debt monetisation.