What is Quantitative Easing (QE)?

Full Definition

Quantitative Easing (QE) is an unconventional monetary policy tool used by central banks, including the Bank of England, in which the central bank creates new central bank reserves electronically and uses them to buy financial assets, mainly government bonds (gilts in the UK), from banks and other investors. The intended effect is to push up the price of those bonds (and so lower their yield/interest rate), encourage the money received by sellers to be reinvested elsewhere in the economy, and generally push down borrowing costs across the economy at a time when cutting the base rate further is not possible or judged insufficient, such as when interest rates are already very low, as after the 2008 financial crisis and again during the Covid-19 pandemic. QE can influence UK mortgage and savings rates indirectly by affecting the gilt yield curve that lenders reference when pricing fixed-rate products, and by generally supporting asset prices, including shares and bonds held in pensions and ISAs. The reverse process, quantitative tightening (QT), involves the central bank reducing its bond holdings again -- either by letting bonds mature without reinvesting the proceeds, or by actively selling them -- which tends to have the opposite effect of pushing yields, and often broader borrowing costs, higher, and has become a significant factor affecting UK gilt yields and fixed mortgage pricing in recent years.

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