To QE, or not to QE
Quantitative easing – or “money printing” as it is sometimes known – has been used by the United Kingdom, United States and Japan amid the recession and the recovery. It is a measure to inject money directly into the economy to try to increase economic activity when growth is slow and interest rates are very low. It is important as it has implications for the economy and the exchange rate.
Quantitative easing increases the supply of money
The Bank of England explains how quantitative easing works in the Quantitative Easing Explained section of its website. Under the scheme, money is injected into the economy by a central bank buying assets (such as government bonds) from banks and other financial institutions with electronic credits. The electronic credits can be used by financial institutions to buy other assets (such as shares or property), to lend to companies and individuals or they can be converted to cash if people want the money to spend. Quantitative easing is used only when interest rates are close to zero and there is little ability to encourage spending by lowering rates further. Because electronic credits are used, quantitative easing does not directly involve printing money, despite it being referred to by some as “printing money”.
Be warned: Printing money is not printing wealth
The phrase “printing money” might sound like a way of making households richer, in fact there is a risk that it will make them poorer in the long run because extra money in the system could push up inflation and reduce the value of the money supply. Central banks will try to avoid this by reducing the supply of money as growth returns. Quantitative easing keeps interest rates low, which in turn is likely to lead to low rates for savers but allow borrowing at low rates as well.