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Effects of Quantitative Easing

Quantitative Easing (QE) is when a central bank directly buys its government bonds. The idea is that – when a central bank has already cut interest rates close to zero – directly buying government bonds decreases their yields those bonds pay. Several other loans’ interest rates are based on the yield of government bonds – so, by depressing those yields, the central bank makes it cheaper for companies and people to borrow money than a low interest rate alone would. It’s hoped that the borrowed money will be used to do things that boost the economy (like buying machinery or hiring workers). Another impact of QE is that it could encourage investors to buy riskier investments. If the returns available from government bonds are low, then investors may be more likely to seek out riskier investments (like stocks) that offer higher potential returns. That tends to boost share prices, which feeds through to investors’ pockets – and, in theory, can spur economic activity. For the same reason, QE has been criticized for increasing inequality in the sense that it arguably benefits those that already own assets more than those that don’t.

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