Quantitative easing has been a primary tool of central banks worldwide in recent years. They were primarily put to use after the 2008 financial crisis in an attempt to keep the worldwide economy afloat.
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It can be a complex action but generally, quantitative easing involves central banks purchasing a certain amount of financial assets from the open market.
These assets can often be referred to as securities and will often primarily include bonds.
It is considered a dramatic move but central banks do this to flood the economy with money, which will hopefully improve liquidity and confidence.
The Bank of England themselves explain this further and provide insight into why they do it.
As their website details: “Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.
“Money is either physical, like banknotes, or digital, like the money in your bank account. “Quantitative easing involves us creating digital money.
“We then use it to buy things like government debt in the form of bonds
“The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.”
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For the UK, rounds of quantitative easing have been announced in response to certain economic conditions.
As mentioned, one of the most dramatic events to incur quantitative easing was the credit crunch. In November 2009, the BOE purchased £200billion of bonds.
Following this, the central bank continued to purchase more bonds as the economic conditions continued to move.
In July 2012 the bank increased its holding to £375billion in bonds, followed by £435billion in August 2016.
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However, the bank announced another increase to its holdings in March 2020
A further £200billion of bonds have been added, bringing the total to £645billion.
Many economists believe that the quantitative easing done by central banks in response to the 2008 crisis saved the global economy, however continued uses of the action have been called into question.
Some believe that the benefits of further quantitative easing are limited and that their repercussions may be doing more harm than good.
Quantitative easing can have a negative impact on inflation as the money supply increases. On top of this, the currency itself may become less attractive for investors.
Michael Brown, a Senior Market Analyst for Caxton Business explained how this works in more detail: “Generally you would expect QE to weaken a currency.
The aim of QE is to reduce bond yields across a range of maturities; as a result, lower yields makes a currency less attractive for investors hence the weakness.”
The UK has not been the only nation to launch quantitative easing programmes in recent weeks. Thus far, Canada, the US and New Zealand (among others) have all bought financial securities worth billions to support their economies.
This is a direct response to coronavirus which is expected to wreak continuing havoc on economies across the globe. On top of this, central banks have been making changes elsewhere to further support the monetary supply. Interest rates, which were already very low, have been reduced.
The Bank of England has reduced the base rate to 0.1 percent while the Federal Reserve reduced theirs to a range between 0-0.25 percent.
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