Demystifying the economy |  Quantitative easing by central banks: what is it?

Demystifying the economy | Quantitative easing by central banks: what is it?

Every Saturday, one of our journalists answers, in the company of experts, one of your questions about economics, finance, markets, etc.

Posted yesterday at 6:00 am

Martin Vallieres

Martin Vallieres

When we talk about central banks and economics, what does the expression “quantitative easing” or “QE” mean in reference to the English term “quantitative easing”? What is this “quantitative easing” for a central bank like the US Fed? [Réserve fédérale]in addition to your interest rate decisions?

Mireille DionMontreal

Financial measures known as “quantitative easing” were introduced some fifteen years ago among the major central banks of the industrialized world.

They are now, along with decisions related to interest rates, among the main intervention tools of the monetary authorities to regularize the economic situation around target objectives in terms of growth, inflation and employment rates, in particular.

What is it about ?

Central banks’ quantitative easing measures consist of massive purchases of quality debt securities from major players in financial asset markets.

These massive purchases of debt securities, in the tens or hundreds of billions of dollars, are intended to inject liquidity into a weakened economy to stimulate growth.

By quality debt securities we mean mainly bonds of public origin (governments, state corporations) or issued by large companies of high financial quality.

Central banks sometimes include debt securities backed by financial assets, such as mortgages, in their purchases.

Since when ?

Quantitative easing measures have long been limited to research and theoretical analysis in high finance and economic circles.

Its first large-scale concrete application dates back to 2001 by the Bank of Japan, which then sought to lift the Japanese economy out of a decade of stagnation and intermittent recessions.

In North America and Europe, it was the episodes of economic crisis caused by the financial crisis of 2008-2009 and the global pandemic of COVID-19 in 2020-2021 that led to the massive use of quantitative easing by the federal government. Reserve (Fed), the European Central Bank (ECB) and the Bank of England.

What impact on the economy?

To correctly answer this question, Press called the economist Jocelyn Paquet at the National Bank.

First of all, he explains, it should be noted that quantitative easing measures were introduced by central banks when their main tool of intervention in the economy, namely lowering or raising interest rates, had been practically neutralized for many years. very low interest rates. .

In past recessions, when interest rates could hover between 6% and 8%, central banks had room to lower rates to stimulate the economy.

Jocelyn Paquet, economist at the National Bank

“But during the recession that followed the 2008 financial crisis, interest rates were already very low. Central banks, particularly the US Federal Reserve, have not had room to cut funding costs to stimulate the economy.

“Central banks have decided to resort to massive purchases of debt securities in the bond markets to support their market value and, consequently, dampen bond yield expectations, which are determining factors for interest rates and prices. financing costs throughout the economy. »

Money creation?

In addition, explains Jocelyn Paquet, the operation of these massive purchases of debt securities by central banks from the main financial institutions constitutes a powerful generator of new liquidity in an economy already under stress.

“Ultimately, for central banks, quantitative easing measures have become a major component of their money creation process to stimulate the economy. However, if these measures remain at a high level for a long time, they risk triggering and amplifying inflationary pressures, stresses Jocelyn Paquet.

“This is what we have seen over the past year with inflation rising rapidly to a record level in some thirty years. This comes after a massive episode of quantitative easing by central banks to support the economy during the pandemic crisis, coupled with record government spending and budget deficits for financial aid to individuals and businesses during the crisis. »

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