Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Quantitative Easing” Quantitative easing also known as QE is an
unconventional form of monetary policy where a Central Bank creates new money electronically
to buy financial assets, like government bonds.
This process aims to directly increase private sector spending in the economy and return
inflation to target.
One of the main tools they have to control growth is raising or lowering interest rates.
Lower interest rates encourage people or companies to spend money, rather than save.
But when interest rates are almost at zero, central banks need to adopt different tactics
- such as pumping money directly into the economy.
This process is known as quantitative easing or QE.
The central bank buys assets, usually government bonds, with money it has "printed" - or created
electronically these days.
It then uses this money to buy bonds from investors such as banks or pension funds using
this "new" money, which increases the amount of cash in the financial system, encouraging
financial institutions to lend more to businesses and individuals.
This in turn should allow them to invest and spend more, hopefully increasing growth.