Explainer - How does Quantitative Easing work?

Quantative Easing

Monetary policy generally operates by steering short-term interest rates. But, during times of persistently low economic growth and inflation, it might not be possible to reduce interest rates.

At times like these to help stimulate the economy, central banks use Quantitative Easing a tool that, in the euro area, is called the expanded Asset Purchase Programme (APP).

Within the APP, Eurosystem national central banks buy assets from banks. This increases the price of these assets and creates money in the banking system. As a consequence, a wide range of interest rates fall and loans become cheaper. Businesses and people are able to borrow more and spend less to repay their debts. As a result, consumption and investment receive a boost. Higher consumption and more investment support economic growth and job creation.

The expanded Asset Purchase Programme begun in March 2015, and is expected to run until at least September 2018.

Following the financial crisis of 2008-2009, large central banks like the USA’s Federal Reserve and the Bank of England also began asset purchase programmes in an effort to stimulate economic growth.

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