Quantitative Easing

Subject: Economy

Context:

The Bank of England conducted its first auction to sell government bonds from its quantitative easing stockpile.

Details:

It has been reducing its holdings of British government bonds, known as gilts, bought under quantitative easing QE in addition to not reinvesting the proceeds of maturing bonds..
The Federal Reserve and Bank of Canada have adopted similar policies, sometimes known as passive quantitative tightening (QT).

Concept:

Why is the Bank Of England selling GILTS?

British government bonds have a longer average maturity than those issued by other countries, so the BoE has to sell gilts to achieve the same pace of balance sheet reduction that other central banks would get by simply allowing their bonds to mature.
It intends to partially reverse QE–may help fight inflation, to the extent it pushes up borrowing costs and gives the government, business and the public less money to spend on other things.
- Though raising interest rates is its main tool for controlling inflation, because the impact is better understood than that of QT.

Quantitative easing

It is an occasionally used monetary policy, which is adopted by the central banks to increase money supply in the economy in order to further increase lending by commercial banks and spending by consumers.
The central bank infuses a predetermined quantity of money into the economy by buying financial assets from commercial banks and private entities. This leads to an increase in banks’ reserves.
It involves Central banks purchasing securities from the open market to reduce interest rates and increase the money supply.
- Quantitative easing thus, creates new bank reserves, providing banks with more liquidity and encouraging lending and investment.
Globally, central banks have attempted to deploy quantitative easing as a means of preventing recession and deflation in their countries with similarly inconclusive results.
Commonly, the effects of quantitative easing benefit borrowers over savers and investors over non-investors.

Difference between Conventional Monetary Policies and Quantitative Easing?

Normally the central bank follows an easy money policy (low interest rates) when they need to promote growth and a tight money policy (high interest rates) when they concentrate on controlling inflation.
- The Reserve Bank of India either sells or purchases Government Securities to/from the public.
Quantitative Easing is mainly an asset purchase or asset swap policy. The purpose is to increase money supply to the banks.
A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base and lowering the yield on those financial assets. This is distinguished from the more usual policy of buying or selling short term government bonds in order to keep interbank interest rates at a specified target value.
- Thus, QE is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.