Quantitative easing (QE) is an unconventional monetary policy in which a central bank purchases large quantities of longer-dated financial assets, typically government bonds, to inject liquidity into the financial system and lower long-term interest rates. It is deployed when short-term policy rates are already near zero and conventional rate cuts are exhausted. By expanding the central bank’s balance sheet and the monetary base, QE aims to stimulate lending, asset prices and aggregate demand.
Overview
- QE became prominent after the 2008 global financial crisis and again during the COVID-19 pandemic, when several major central banks used large-scale asset purchases to support markets and the wider economy. The mechanism works through several channels: portfolio rebalancing (pushing investors into riskier assets), signalling (committing to accommodative policy), and direct compression of term premia. Its eventual reversal, the gradual sale or run-off of accumulated assets, is known as quantitative tightening.
Mechanisms
- Large-scale purchases of government bonds and sometimes corporate or mortgage securities.
- Expansion of the central bank balance sheet and bank reserves.
- Portfolio-rebalancing channel pushes investors toward higher-yield assets.
- Signalling channel reinforces a commitment to low policy rates.
- Reversal through balance-sheet run-off is termed quantitative tightening.
Applications
- Stabilising bond markets during financial crises.
- Lowering long-term borrowing costs for governments and firms.
- Supporting credit supply when policy rates hit the effective lower bound.
- Countering deflationary pressure and weak aggregate demand.