Central banks use quantitative easing as one tool to support economies when interest rates are very low. It is important as it has implications for economic success and exchange rates. But the term is perhaps not widely understood.
It’s not exactly “printing money”
In an eZonomics poll, just 26% of respondents said they knew what quantitative easing was. Quantitative easing (or QE) is a measure to inject money directly into the economy with the aim of increasing the money supply and spending. The Bank of England explains how quantitative easing works in the UK in the Quantitative Easing Explained section of its website.
Under the scheme, a central bank injects money into the economy by buying assets (such as government bonds) from banks and other financial institutions with electronic credits. These 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. The phrase “money printing” is often considered technically incorrect because the credits are only converted into printed money as there is demand.
The ING Group chief economist explains the nitty gritty
ING Group chief economist Mark Cliffe issued a presentation QE or not QE? on 10 February 2010, when he said the US may be “about to launch another round of quantitative easing”. It did go on to launch the second round then announced a third round (QE3) in September 2012.
In the 2010 presentation, Cliffe explains in more technical terms how quantitative easing works and potential impacts of further quantitative easing for the US. He says evaluating the impact of quantitative easing so far is “very hard”. He writes that the second round of quantitative easing would likely be “step-by-step” rather than an unexpectedly large “shock and awe” sized programme.