Why does The bank of England use quantitative easing?
It’s our job to keep the prices of things you buy low and stable, as this helps to support people’s jobs and incomes.
To keep inflation on target we usually change a key interest rate in the economy (called Bank Rate). Changes in Bank Rate feed through to how much interest you get on savings, and how much interest you pay on a loan. That affects the amount of spending in the economy and so helps inflation to either fall or rise.
But things changed during the Global Financial Crisis that began in 2008. At that time, we quickly reduced Bank Rate from 5% to 0.5% to help the UK economy recover.
Even with Bank Rate that low, we needed to do more to boost the economy and meet our inflation target. That’s where quantitative easing comes in.
How does quantitative easing work?
Quantitative easing (or QE) acts in a similar way to cuts in Bank Rate. It lowers the interest rates on savings and loans. And that stimulates spending in the economy.
Here’s how QE works:
We buy UK government or corporate bonds from other financial companies and pension funds.
When we do this, the price of these bonds tend to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down.
The lower interest rate on UK government and corporate bonds then feeds through to lower interest rates on loans for households and businesses. That helps to boost spending in the economy and keep inflation at target.
QE also affects the prices of other assets like shares and property.
Here’s an example. Say we buy £1 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £1 million in cash.
Rather than hold on to that cash, it will normally invest it in other financial assets, such as shares, that give it a higher return.
In turn, that tends to push up on the value of shares, making households and businesses holding those shares wealthier. That makes them likely to spend more, boosting economic activity.
Does quantitative easing work?
Yes it does. A number of studies have shown that QE can have a big impact on inflation and spending in the economy. And we’re not alone in using QE. It’s also been used in countries such as the US, Euro area and Japan.
How much quantitative easing have we done in the UK?
We began buying bonds through QE in March 2009 as a response to the Global Financial Crisis. Between 2009 and 2021, we bought £895 billion worth of bonds through QE. We used most of that sum (£875 billion) to buy UK government bonds. We used a much smaller part (£20 billion) to buy UK corporate bonds.
The chart below shows how our purchases of bonds built up over the years.
Chart showing changes in Bank of England purchases of government bonds between November 2009 and June 2020
What is quantitative tightening (QT)?
Some people refer to the process through which central banks reverse, or ‘unwind’, their QE programmes as ‘quantitative tightening’, or QT.
We announced our last round of purchases in November 2020 and that ended in December 2021. Now we have stopped reinvesting the proceeds when a bond matures. A government bond matured in March 2022, so the amount of bonds we hold has already started to fall.
We haven’t actively sold any government bonds yet. But we have started to consider when and how we will sell some of the government bonds we have bought.
Does quantitative easing help to pay for government spending?
QE lowers the cost of borrowing throughout the economy, including for the government. That’s because one of the ways that QE works is by lowering the bond yield or ‘interest rate’ on UK government bonds.
But that’s not why we do QE. We do it to support growth and jobs and help to hit our inflation target.