Quantitative easing (QE)

Quantitative easing is an unconventional monetary policy tool. When a central bank has already cut its policy rate close to zero, it can still try to ease conditions by buying assets, mostly government bonds, paid for with newly created central bank reserves. The purchases push up bond prices and push down their yields, which is meant to lower borrowing costs across the economy and support spending and inflation.

Where it has been used

The Bank of Japan used QE in the early 2000s. After the 2008 financial crisis, the US Federal Reserve and the Bank of England launched large programmes, and the European Central Bank began broad government bond buying in 2015. Many central banks expanded purchases sharply in 2020 during the pandemic.

The reverse, quantitative tightening (QT), means shrinking the balance sheet by letting bonds mature without reinvesting, or by selling them.

Why it matters for forex

QE generally lowers yields on a country's assets relative to others, which can make its currency less attractive to hold. Markets tend to react to changes in expected purchases rather than the programme itself, so announcements, forward guidance and hints of tapering often matter more than the purchases.

Example

Illustrative figures: if a central bank's QE helps push the 10-year yield from 2.0% to 1.5% while a comparable foreign yield stays at 3.0%, the interest rate differential widens from 1.0 to 1.5 percentage points in the foreign currency's favour, all else being equal.

Common misconception

QE is often described as "printing money". Central banks create reserves, not banknotes, and the link to inflation has proven loose in practice. See central banks and interest rates.