In response to the economic crisis that has been caused by the coronavirus (COVID-19) pandemic and subsequent global lockdown, countries around the globe have had to take fiscal action in order to mitigate the ongoing financial effects. In March and June 2020, the Bank of England announced hundreds of billions of British pounds in stimulus after cutting interest rates twice since the beginning of the coronavirus pandemic.
What is quantitative easing?
Quantitative easing (QE), otherwise known as asset purchases, are often referred to as a last resort by central banks to stimulate an economy during economic crisis. Spurred on by a sharp decline in business and consumer spending, low or negative inflation and unwillingness by lenders to loan money, quantitative easing looks to inject money directly into the economy in a bid to maintain country inflation targets of two percent. Since QE measures have taken effect, large enterprises in the United Kingdom have jumped at low interest rate loans. In particular, key industries including construction, transport, real estate and manufacturing have all been stimulated into borrowing as of March 2020.
How does QE work?
To enable this, central banks purchase assets in the form of government bonds and to a lesser extent corporate bonds from private sector businesses, including insurance companies, pension funds, banks and non-financial firms. This purchasing of assets increases their price and in doing so reduces their yield, which means a lower return on those assets. In turn, the injection of cash encourages the sellers of these assets to purchase other financial assets such as shares and bonds. The lowering of yields through asset purchases means that the cost of borrowing for businesses and households is reduced, leading to an increase in consumer spending and investments, hopefully putting the economy back on track.
