What on earth is Quantitive Easing? 16/04/09

Author: Jeni Browne Posted on: 16 April 2009

Quantitive Easing, while not a newly invented term, is one that you are going to be hearing about more and more.  And as it is part of the Goverments rally to sort out the credit crunch and general doom and gloom of the moment, I thought it may be quite useful to explain what it actually is.

In layman's terms, quantitative easing refers to the creation of a significant amount of new money (usually electronically) by a central bank. This money is created to stimulate the economy, in particular to promote lending by banks. The central banks add cash by buying up large quantities of securities from banks, giving them new money to lend. These securities could be government bonds, commercial loans, asset backed securities, or even stocks. Quantitative easing is usually used when lowering official interest rates is no longer effective because they are already close to or at zero.

'Quantitative' refers to the fact that a specific quantity of money is being created; 'easing' refers to reducing the pressure on banks. A central bank can do this by using the new money to buy government bonds (treasury securities in the United States) in the open market; or by lending the new money to deposit-taking institutions; or by buying assets from banks in exchange for currency; or any combination of these actions. These have the effects of reducing interest yields on government bonds and reducing interbank overnight interest rates, and thereby encourage banks to loan money to higher interest-paying bodies.

Put even more simply (into the kind of language I understand) and into a nutshell, Quantitive Easing is the creation of money by a Central Bank, of which the aim is to get banks lending.  The Central Bank basically buys lots of the banks securities which in turn means the bank has more cash to lend to the public.

Got it? Lovely.  Lets hope it works (as it looks like it may be starting to).

Author: Jeni Browne