Posted in Finance, Accounting and Economics Terms, Total Reads: 642
Definition: Quantitative Easing
The monetary policy of a central bank directs it to purchase assets financed by new money that the bank created electronically. This policy is designed to inject money into directly into the economy. This is done in response to the sharp fall in demand as business and consumers reduced their spending. In short there is not enough money in the economy. The aim is to boost spending to keep inflation on track to meet the target. Along side its decisions on asset purchases, the monetary policy committee continues to set bank rate each month. The bank purchases assets from private sector businesses, large quantity of assets is available in the market hence can be purchased very easily and quickly.
When the Central bank purchases assets it increases the asset price and decreases their asset yield. This increases the purchasing by other businesses and consumers, which tends to increase the asset price and decrease the asset yield, which in turn makes the borrowing of money easier. And increases the spending of money that can be borrowed relatively easily.