What is quantitative easing?

Quantitative easing is when a central bank creates new money and uses it to buy government bonds from investors, to push long-term interest rates down once its main interest rate can usefully go no lower. The Bank of England began doing it in March 2009.

Why the Bank of England started buying bonds

The Bank's job is to hold inflation at the 2 per cent target the government sets, and its usual lever is Bank Rate. In March 2009, with output still shrinking, Bank Rate came down to 0.5 per cent. Going much lower looked unhelpful. Savers can always switch to cash, which pays nothing, and deeper cuts would have squeezed lenders' profits and with them their lending. The Bank needed another way to make borrowing cheaper.

How the buying works

A company owned by the Bank bought government bonds, called gilts, second-hand from pension funds, insurers and other investors. It paid with reserves: electronic money held in banks' accounts at the Bank, which households and firms cannot hold or spend. No banknotes were printed, and the government was not paid directly.

The sellers used their new deposits to buy shares and company bonds. Heavy buying raised gilt prices, and because a gilt pays a fixed sum each year, a higher price means a lower yield. Mortgage and business loan rates, which take their cue from gilt yields, came down too.

How big it became and what it did

Buying went on in rounds until the end of 2021, when the Bank held £875 billion of gilts. Banks' reserves grew from about £39 billion in February 2009 to about £977 billion in January 2022. Prices did not follow: consumer price inflation averaged about 2.2 per cent a year from 2009 to 2019.

The Bank's own economists reckoned the first round lifted output by 1.5 to 2 per cent at its peak, about what cutting Bank Rate by 150 to 300 basis points would have achieved. Because the buying worked by lifting asset prices, those who owned the most gained the most in pounds. One estimate gave 40 per cent of the wealth gain to the richest tenth of families and 12 per cent to the whole bottom half.

How quantitative easing is being unwound

Reserves earn Bank Rate, while gilts pay a fixed rate. While rates were low this earned money for the Treasury, which had received £123.9 billion by the end of September 2022. When inflation returned and Bank Rate reached 5.25 per cent by August 2023, the flow reversed, and the Treasury now covers the losses.

Since 2022 the Bank has been shrinking its holdings, first by letting gilts mature and then by selling them. It plans to have none of its monetary-policy gilts left by 2034, and to lend banks the reserves they need instead. The tool remains available for a future downturn.