What is quantitative easing?
Updated on 06 March 2009
As the Bank of England considers embarking on quantitative easing, Channel 4 News online explains what it means.
Q: What is quantitative easing?
A: QE aims to increase the amount of money in the economy. The Bank of England (BoE) is doing this by buying up assets, in particular commercial bonds. Since the onset of the credit crunch, banks worried about the strength of their finances have tightened up lending dramatically, so this is an attempt to kick-start the process.
At its most simple level, this new money will be used to buy debts - for example from banks - so they've in theory more money to lend again, or to tidy up their balance sheet. The principle aim of this experiment is to lower interest rates for consumers and companies.
Faisal Islam explains
Q: Has it been done before?
A: While printing extra money is not a new practice, post-WW I Germany and Japan have both done it, QE in this regard is a new experiment - there is no precedent for it in the current economic conditions.
Q: Is it literally printing money?
A: In effect it is, although the BoE does not literally turn on the printing presses to send a huge flurry of new notes into the economy.
What will happen is that the Bank will create the money to buy the assets and credit the reserves of various banks and financial institutions with the new money. It was been suggested up to £150bn could be created.
Q: What are the risks?
A: Strangely enough, the main risk is that it could work too well. If too much money is pumped into the market for too long, inflation could start shooting up. It is important that the BoE stops QE as early as possible. The analogy would be, from an engine that has been flooded with petrol revs up once you get it going again.
Q: Is anyone else doing this and will it work?
A: The United States is embarking on a similar programme of QE at the same time. No-one can predict with certainty whether it will work, these are uncharted waters.
