What is quantitative easing?

Quantitative easing is a complicated monetary policyThe Bank of England chose to keep the base rate on hold at 0.5% again this month, despite the economy having grown by just 0.1% in the second quarter of the year.

Instead, it will try to boost the economy by purchasing bonds worth £75 billion – a policy known as quantitative easing (QE). But just what is QE? And how does it help?
What is QE?
QE is an unconventional monetary policy - sometimes referred to as "printing" money - that is used by central banks such as the Bank of England to ease monetary conditions and aid economic recovery.

It is used as a "last resort" to increase the supply of money available when interest rates are either at or close to 0% - as they are at the moment – and cannot therefore be further reduced to give the economy a lift.

It involves the bank spending its own money on bonds, usually issued by the government of the country in which it is based. For the Bank of England, this would therefore be UK government bonds.

The aim is to increase demand for bonds, which in turn lowers the yield, bringing down long-term interest rates and making borrowing cheaper.

How does that help?
The stock market likes listed companies having access to cheap credit, leading to higher valuations, while cheaper mortgages make it easier for people to get on to the housing ladder or move to more expensive properties.

Both the stock market and the housing market should therefore benefit from QE.

However, the main aim of this round of QE is to make it easier for small businesses – many of which have struggled in the downturn – to get their hands on the cash they need to succeed and expand.

Are there any risks?
Some economists argue that "printing" money always leads to higher inflation.

This could prove problematic as the rate of inflation in the UK is already at 4.5% - more than double the Bank of England's target of 2%.

Lower yields on government bonds is also bad news for pension fund savers.

However, advocates of QE believe that the sophisticated purchase and re-sale of government bonds can be done in a way that prevents inflation.
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