Quantitative easing (QE) involves electronically expanding a central bank’s balance sheet. So under its Asset Purchase Facility the Bank of England will buy directly from commercial banks “high-quality assets, broadly comparable to investment grade”. These will range from fixed-income sovereign debt and corporate bonds to ‘asset-backed’ securities built on property loans. On the flipside, the Bank will also sell fewer of its own IOUs – gilts – to institutions such as pension funds. The two measures combined should release extra liquidity into the economy.
‘Monetarist’ theory says that both economic activity and price levels are set by the amount of money available multiplied by the speed at which it moves around (‘the velocity of money’). So, by physically upping the cash that commercial lenders have at their disposal – by buying assets from them that other banks may be reluctant to accept as security for loans – the idea is that quantitative easing will directly boost interbank lending and raise the flow of credit through the economy as banks regain the confidence to make other loans to, say, small businesses and homeowners.
• For more on QE, see Tim Bennett’s video tutorial