What is quantitative easing?

Quantitative easing, commonly abbreviated to QE, is a monetary policy tool in which a central bank creates new money electronically and uses it to purchase financial assets, primarily government bonds, from banks and other financial institutions. The purpose is to increase the supply of money in the financial system, lower long-term borrowing costs, and stimulate economic activity. It is used when conventional monetary policy, lowering interest rates, has reached its limit.

How quantitative easing works

When a central bank such as the Bank of England decides to implement QE, it does not print physical banknotes. It creates new money electronically and credits the accounts of the commercial banks from which it buys assets. Those banks receive cash in exchange for the bonds they were holding. In theory, they then use that cash to make new loans or buy other assets, stimulating activity across the economy.

The mechanism also works through asset prices. By buying large quantities of government bonds, the central bank drives up their price and drives down their yield, which is the return an investor receives. Because government bond yields set a reference point for other borrowing costs, lower gilt yields reduce the cost of corporate borrowing, mortgage lending, and other forms of credit across the economy. Lower borrowing costs are intended to encourage investment and spending.

Why conventional interest rate cuts are sometimes insufficient

Central banks normally stimulate the economy by cutting short-term interest rates. Lower rates reduce the cost of borrowing, encouraging households to spend and businesses to invest. But this tool has a floor: interest rates cannot be cut below zero (or not far below zero) without creating serious distortions in the banking system. When rates are at or near zero and more stimulus is needed, QE provides an alternative way to ease financial conditions without cutting rates further.

The Bank of England first used QE in March 2009, in the aftermath of the global financial crisis, when the bank rate had already been cut to 0.5 percent. By purchasing gilts directly, the Bank aimed to push money into the financial system and prevent a deflationary collapse. The initial programme was £75 billion.

The Bank of England's QE history

The Bank of England expanded its QE programme significantly over time. By the end of 2012, the total stock of asset purchases reached £375 billion. The programme was expanded again during the Brexit uncertainty of 2016 and reached a peak of £895 billion during the pandemic in 2021, when the Bank purchased gilts on an extraordinary scale to stabilise financial markets and support the economy through lockdowns.

From late 2021 onwards, as inflation surged, the Bank began reversing course. It stopped reinvesting the proceeds of maturing gilts and later began actively selling gilts back into the market, a process known as quantitative tightening or QT. By 2026, the Bank's stock of gilt holdings had been reduced substantially from its peak, though it remains large relative to pre-2009 norms.

What quantitative tightening is

Quantitative tightening is the opposite of QE. Where QE involves buying assets to expand the money supply and lower borrowing costs, QT involves selling assets or allowing them to mature without replacement, shrinking the central bank's balance sheet. The Bank of England's QT programme, which began in 2022 alongside interest rate rises, has reduced the gilt stock it holds and withdrawn some of the liquidity injected during the QE years. QT puts modest upward pressure on gilt yields, tightening financial conditions as part of the broader effort to reduce inflation.

Does quantitative easing work?

The evidence on QE's effectiveness is genuinely contested. Most economists agree that QE prevented a deeper financial crisis in 2009 and helped stabilise markets in 2020. Whether it produced lasting economic stimulus beyond those crisis management functions is less clear. Critics argue that QE primarily inflated asset prices, benefiting holders of financial assets (mainly wealthier households) without materially improving conditions for the broader economy. Defenders argue that without QE, credit conditions would have tightened severely and the recessions of 2008-09 and 2020 would have been substantially worse.

The relationship between QE, the money supply, and inflation was also tested by events. Many critics predicted that QE would cause inflation almost immediately. It did not, until the pandemic-era money creation coincided with supply chain disruption and demand stimulus, at which point inflation did surge. Whether QE was a significant cause of the 2021-2023 inflation surge or merely a coincidental backdrop remains debated.

For the full context on how the Bank of England's monetary policy decisions, including both interest rate changes and QE, feed through to borrowing costs and the economy, see our note on the Bank of England base rate. CPIx, Briefed's composite consumer pressure index, tracks financial conditions in real time. The Briefed daily briefing covers every monetary policy decision. Free to read.