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Quantitative Easing · 4 of 9

The Scale of Quantitative Easing

Explain how large the Bank of England's purchases became, what happened to prices as reserves rose, and how the buying lowered borrowing costs.

Before you start

What you'll be able to answer

  1. How much did the Bank of England buy, and how far did banks' reserves rise?
  2. What happened to prices as reserves rose?
  3. What did the purchases do to borrowing costs?

Where this sits

Quantitative Easing · this module is lit

  1. 1998The Bank of England Act gives interest rate decisions to a committee at the Bank; the Chancellor keeps the target
  2. Mar 2009Bank Rate is cut to 0.5 per cent, and the Bank starts buying government bonds with newly created money
  3. Aug 2013The Bank says it will not consider raising interest rates at least until unemployment falls to 7 per cent
  4. Mar 2020Bank Rate is cut to a new low
  5. Jan 2022Banks' reserves at the Bank reach their highest level
  6. Sep 2022The Bank buys government bonds again, to stop forced selling by pension funds
  7. Oct 2022Consumer price inflation reaches 11.1 per cent
  8. Nov 2022The Bank starts selling its bonds to investors, among the first central banks to do so
  9. Aug 2023Bank Rate reaches its peak after rises at consecutive meetings
  10. Apr 2026The Governor writes an open letter to the Chancellor after inflation overshoots the target

The Bank kept buying gilts long after it began

In March 2009 the Bank of England began buying gilts, the government's bonds, with newly created reserves, the money that banks hold in accounts at the Bank. The Bank's Monetary Policy Committee planned the first round to last three months, then enlarged it and extended it. The Bank went on to buy more, round after round, until the end of 2021. In the United States, where the Federal Reserve was buying bonds in the same way, some economists warned that the new money could send prices up sharply.

Predict first

Banks' reserves at the Bank rose many times over after 2009. From 2009 to 2019, how fast did consumer prices rise, on average?

The Bank bought gilts in rounds from 2009 to 2021

The first round was finished in January 2010, when the Bank had bought £200 billion of gilts. More rounds followed, including one after the vote in 2016 to leave the European Union. By the end of 2019 the Bank held £435 billion of gilts.

When the Covid-19 pandemic struck in 2020, the Committee added to the purchases three times in eight months. By November 2020 the purchases it had announced, almost all of them gilts and the rest bonds issued by companies, were worth over 40 per cent of the country's annual GDP, the value of everything it produces in a year. The Bank stopped adding to its holdings at the end of 2021. By then it held £875 billion of gilts, counted at the prices it paid.

Banks' reserves at the Bank peaked in January 2022

As the previous module showed, each purchase created two things: new reserves for the seller's bank, and a new deposit for the seller. So reserves grew with the purchases. In the twelve months before September 2008, reserves averaged about £25 billion. In January 2022 they averaged about £977 billion, their highest monthly average.

Cash, the notes and coin people spend in shops, grew far more slowly. Over the same period it roughly doubled, from about £49 billion to about £95 billion.