What is Quantitative easing

Quantitative easing (QE) is an unorthodox monetary policy which since 2009 has been intermittently pursued by Bank of England and US Federal Reserve Bank. QE has been used to stimulate aggregate demand in order to encourage economic activity and therefore to bring the economy out of deep recession and to prevent it re-entering recession.

A central bank operates QE by electronically creating new money in central bank's own current account. It uses this newly created electronic money to buy assets like government bonds, equities, houses, corporate bonds or other assets from banks. The aim is to inject liquidity into financial markets and push up asset prices by increasing demand for assets. Higher bond prices cause bond yields and hence long-run interest rates to fall.

The hope is that as the banks sell assets to central bank they have greater liquidity and receive deposits that they in turn use to lend to businesses.