What Is Quantitative Easing?
Cutting interest rates is usually a central bank's go-to move when the economy needs help. But rates can only fall so far before there is nothing left to cut — and that is when policymakers reach for a much bigger tool called quantitative easing.
TL;DR: Quantitative easing, or QE, is when a central bank creates new money electronically and uses it to buy large quantities of government bonds. That pushes bond yields down and nudges investors toward other assets, including shares, when ordinary interest rate cuts have run out of road.
What is quantitative easing, in plain English?
Quantitative easing is a central bank creating new money and using it to buy bonds on a large scale, usually government bonds, directly from banks, pension funds and other big investors. Think of the central bank as suddenly becoming the biggest buyer in the bond market, showing up with an enormous amount of freshly created cash and offering to purchase bonds from whoever is willing to sell.
That might sound like an odd thing for a central bank to do, but the goal is straightforward: get more money moving through the financial system when the usual lever, cutting interest rates, has already been pulled about as far as it can go.
How does QE actually work?
The mechanics happen in a few clear steps.
- The central bank creates new reserves. This is done electronically, by adding numbers to accounts, not by printing physical banknotes.
- It uses that new money to buy bonds. Mostly government bonds, sometimes corporate bonds, bought from banks and large institutional investors like pension funds.
- Sellers end up holding more cash. The banks and funds that sold their bonds now have far more money sitting in their accounts than before.
- Bond prices rise and yields fall. With the central bank buying so many bonds, demand pushes their price up, and because bond prices and yields move in opposite directions, yields fall.
- Investors look elsewhere for return. With government bonds now offering a lower yield, some of that freshly freed-up cash flows toward other assets, including company shares, in search of a better return.
Why would a central bank do this instead of just cutting rates?
Normally, a central bank's first move to support a struggling economy is to lower its main interest rate, which makes borrowing cheaper for everyone from mortgage holders to businesses. We cover how that works in more detail in our guide to what interest rates do to shares.
The problem is that a rate cannot usefully go much below zero. Once a central bank has already cut its rate close to that floor and the economy still needs more support, the normal lever is maxed out. QE is the backup plan: a different way of pumping money into the system when there is no more room to cut.
QE vs an interest rate cut — what's the difference?
| Tool | What the central bank does | What it presses on directly |
|---|---|---|
| Interest rate cut | Lowers the Bank Rate it charges other banks | The cost of borrowing across the whole economy |
| Quantitative easing | Creates new money and buys bonds | Bond yields and the amount of cash in the financial system |
What does QE mean for share prices in your Student Investor portfolio?
You will not be buying bonds directly while running your virtual £100,000 portfolio in the Student Investor Challenge, but QE still matters for the shares you do hold. When bond yields fall during a period of QE, some investors who would normally be happy earning a safe, steady return from bonds start looking at shares instead, since shares can offer better returns to make up for the extra risk. That extra demand has historically been one of the reasons share prices have risen during past rounds of QE.
That does not make it a one-way bet. Share prices still depend on company profits, the broader economy and investor confidence, and QE is only one influence among many sitting underneath the numbers on the league table.
What is quantitative tightening (QT), and how is it different?
Quantitative tightening, or QT, is QE running in reverse. Instead of buying bonds and adding money to the system, the central bank lets its bond holdings shrink, either by actively selling them or simply letting them mature without buying replacements. Either way, money gets pulled back out of the financial system rather than pumped in.
This matters right now because UK gilt yields have been unusually high, a trend we explored in UK gilt yields hitting an 18-year high. Less central bank buying, or even active selling, is one of the forces that can push bond yields higher — the opposite effect to QE.
A real example — the Bank of England and QE
The Bank of England first launched QE in 2009, during the financial crisis, when it had already cut its Bank Rate close to zero and the economy still needed support. It expanded the programme again in 2020, during the economic shock of the pandemic, buying government bonds on a large scale to keep money flowing through the financial system at a time when normal activity had ground to a halt. You can read the Bank's own account of how the programme has worked in its Quarterly Bulletin.
Does QE cause inflation?
It can contribute to it, but the relationship is not automatic. Adding more money to the financial system is, in theory, a classic ingredient for rising prices, since more money chasing the same amount of goods and services can push those prices up. In practice, though, inflation also depends on demand in the real economy, supply chains, energy costs and plenty else, so a round of QE does not mechanically guarantee a spike in inflation. It is a risk central banks watch closely, not a certainty.
FAQ
Is QE the same as printing money?
Not literally, though it is often described that way. A central bank does not print physical banknotes for QE. Instead it creates new electronic reserves and uses them to buy bonds, which increases the amount of money sitting in the financial system in much the same way printing cash would, just without the paper.
Who decides when to use QE?
A country's central bank, acting independently of the government. In the UK, that decision sits with the Bank of England's Monetary Policy Committee, the same group that sets the Bank Rate, and it is usually announced alongside a detailed explanation of how much the Bank plans to buy and over what period.
Does QE always push share prices up?
Not always, and not on its own. QE tends to support share prices by making bonds less attractive and pushing investors toward other assets, but share prices also respond to company earnings, the wider economy and investor sentiment at the same time. QE is one influence among several, not a guarantee.
What is the opposite of QE?
Quantitative tightening, or QT. Instead of buying bonds and adding money to the system, the central bank lets its bond holdings shrink, either by selling them or letting them mature without replacement, which pulls money back out of the financial system.
Sources: Bank of England — Quarterly Bulletin, House of Lords Library — Quantitative easing.
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