The lowdown on quantitative easing

It’s almost five years since the Bank of England began its quantitative easing programme, also known as QE.

In this video, Ed Bowsher explains how QE works, and whether the money-printing programme has met its objectives.

• See also: What is the ‘taper’?

See all MoneyWeek videos here.

By signing up to any of our free e-letters you consent to receive occasional promotions from us or other companies. We will never give, sell or rent your email address to any other companies. You can unsubscribe at any time by clicking the link at the bottom of each email, or by calling 0207 633 3780. Please see our privacy policy.

It’s almost five years since the Bank of England launched its quantitative easing programme, also known as QE.

So I think it’s a good time to recap what the programme actually is and also look at whether it’s worked.

So what is QE?

Put simply, the Bank of England created money, which it then used to buy gilts from the commercial banks such as HSBC and Barclays.

The Bank did this to achieve these objectives:

The first was to stop deflation. Back in 2009 there were fears that we could have deflation where prices would fall across the economy.

By creating extra money,  the Bank could reduce those deflationary pressures.

The second objective was to reduce long-term interest rates.  The Bank of England normally has the greatest control over short-term rates; that’s for loans that last for days, weeks, or months. The longer the loan, the less influence the bank has.

Instead long-term interest rates are basically set by investors in the gilts market. If investors push up the price of gilts, the yield falls and long-term interest rates across the economy should move down too.

By buying gilts, the Bank of England has reduced gilt yields and long-term interest rates.

So has QE worked?

It’s impossible to give a definitive answer on this as we don’t know what would have happened without QE.

But the reality is we haven’t had a slump, and we haven’t had deflation, and I suspect things might have been different without QE.

On the other hand, QE has also had some negative impacts. Asset prices, especially property and shares have shot up as more money has become available. Rising asset prices have been good for the wealthy not for the rest of us.

QE has also hurt savers because interest rates have been so low and rates on annuities have also been amazingly low.

My hunch is that QE was necessary in the first place but has perhaps been in operation for too long.

Anyway, we appear to be entering the ‘end game’ on QE in at least the US and UK. In the US, there’s much talk about the ‘taper.’ So in my next video I’m going to look at the taper and how QE may be wound down.


Don't miss our next video....

Money Morning - FREE daily investment email

'Money Morning' is our FREE daily investment email. In just a couple of minutes' enjoyable reading each morning, John Stepek (our editor) and regular guest contributors explain to you:

  • What's been going on in the markets
  • How the day's economic and political developments will affect your wealth
  • The latest investment opportunities, and how you can profit

PLUS Get notified of all our new videos and big interviews with influential investors.

Sign up now and get our free report, “London’s Pending Property Crash”.

The London property market is set for a massive price correction. And you must understand what it could mean for your assets how you can profit from the crash too.


A note about our free emails, advertising, and how to unsubscribe.

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you separate promotional emails, which will contain advertisements from us or from other companies. By signing up to our free emails, you are consenting to receive these promotions. However we will never give, sell or rent your email address to any other companies. And if you want to stop receiving our free emails at any time, you can immediately unsubscribe by clicking on the link at the top of each email, or by calling us on 0207 633 3780. For more information, please see our Privacy policy.