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The use of Quantitative easing by different banks


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A key element of financial and credit system of any developed country today is a central bank official speaking guide of monetary policy. In turn, monetary policy, along with the budget is the foundation of all government regulation of the economy. Accordingly, without mastering the techniques of central banks, the tools of monetary policy there cannot be an effective market economy. In the banking system the Central Bank is defined as a major bank and lender of last resort.

This essay is structured as follows. In the first section, this essay will attempt describe main tool of the central bank to influence the economy which is quantitative easing. In addition, the second part will try to describe how this method was used by different countries in the past. Particularly, this essay will attempt to bring to light on the decision of Bank of England against further quantitative easing, and try to explain the reasons and consequences of this decision. Finally, the last section will summarize the main topics discussed in the main body.

Quantitative easing

Quantitative easing is defined as "A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity."

Quantitative easing involves the following procedure: Central Bank of the country start to print money on which it buys government bonds. That is, increasing the money supply, and then injecting it into the financial system.

With these measures CB solves two issues:

The problem of lack of funds. All who need money sell state bonds at the right price or even with a profit. So financial activity is encouraged.

There is a decrease in real interest rates in the economy due to lower yields on bonds. Though it is believed that the stakes in the real economy depend on the base lending rate securities, but in reality they are tied to interest on government bonds because for banks it is easier and safer to buy these securities.

As the result of the quantitative easing liquidity appears in the financial system, and the stimulation of the economy is made by the cheap loans. However, quantitative easing may be used when interbank interest rates are either at, or close to, zero and the normal monetary policy can no longer function.

Quantitative easing used by the Bank of Japan

First quantitative easing was used by the Bank of the Japan in the early 2000s. It was unsuccessful attempt to fight domestic defilation. This showed that large-scale buying of bonds by Central Bank has a little effect on the real economy. Since 1999 The Bank of Japan has maintained shot-term interest rates at close to zero. With quantitative easing it flooded banks with the excess liquidity to promote private lending, leaving them with a little liquidity risk. That was accomplished by the Bank of Japan by buying more government bonds that was required to set the interest rate to zero.

The graph shows - despite the significant increase in excess reserves and a corresponding increase in the monetary policy framework in the period of zero interest rates (1999-2006), the level issued by the Japanese banking system loans have not increased in the same way: "When no one else wanted to borrow - the central bank is powerless." (Taylor 2010)

The Bank of Japan`s quantitative easing


Source: Bank of Japan

Quantitative easing used by the Federal Reserve System

The recent financial crisis had a significant effect on the world's economy. Thus the techniques of quantitative easing were used by Federal Reserve System (FED).

First time quantitative easing (QE1) was used by FED in the spring of 2009. When 1.5 milliard of dollars where injected into the economy. Followed at the peak of the financial crisis and in the midst of the largest since the Second World wave of global economic crisis, QE1 solved the problem of overcoming the collapse of financial markets. Eventually the cost of borrowing has returned to pre-crisis levels, asset prices began to rise and the deflationary shock, similar to the Great Depression, was avoided. For the real economy, this program was much less effective, there is more influenced by fiscal stimulus measures. The U.S. unemployment rate, despite promulgated on November 5 positive data remains high and landings remain on very low level. Despite that FED is planning to increase the amount of liquidity by new injection, the aim of the second stage of Quantitative easing (QE2) is to make already accrued in the accounts of global corporate resources to work. Corporations have a lot of cash after QE1, but yet there is no increase in the investment. Additional injection of liquidity may cause the corporation to spend what they have accumulated, and encourage growth of the economy. Despite that QE2 can be as ineffective as the first phase of the program. Fixed assets will settle in bank reserves, before reaching the real sector. More liquidity would not be able to stimulate consumer demand and reduce unemployment.

Market is growing after launch of QE is and begins to decline when the program stops.


Source: Credit Suisse Group. Research on QE.

Quantitative easing used by European Central Bank

Jean Claude Trichet the president of the ECB announced that the program of purchases of government bonds by the European Central Bank (ECB) designed to support the refinancing of the euro zone countries, especially indebted, and not undermine the efforts of the central bank to ensure low inflation. Trichet has rejected the criticism, according to which the ECB program to purchase the bonds is actually a quantitative easing of its monetary policy. Head of the Central Bank of Germany Axel Weber was one of the most vocal opponents of the program of the ECB's repurchase of sovereign bonds. Weber said that such actions erode the distinction between fiscal and monetary policies. Since the May of this year European central Bank bought the bonds for 67 billion Euros - mainly Irish, Portuguese and Greek. On Thursday, 2 December of 2010, one of the most significant in the last few months' meetings of the European Central Bank took place. At a press conference after the ECB meeting, Jean Claude Trichet said that curtailing incentives of the European economy will be delayed. The regulator intends to provide liquidity to banks in the euro zone during the first quarter of 2011 - at least until April 12.

Bank of England and quantitative easing

After a sharp decline in the key rate to a record low of 0.5% by March 2009, the Bank of England has provided an additional economic stimulus in the form approved by the government program to purchase the bonds, known as quantitative easing.

The central bank in March 2009, began to buy assets worth 75 billion pounds, gradually bringing it up to 200 billion pounds in November 2009 - current levels of programs. This is a huge amount, 14% of UK GDP. However, the amount of funds allocated to the program of quantitative easing may be adjusted depending on the state of affairs in the UK economy. Initial plan of the Bank of England applying QE was to overcome the deflation. After, the implementing the quantitative easing the target of 2.9 inflation rate was reached in December (Gilmore, 2010)

The bank of England began quantitative easing experiment in March 2009 when the world economy was shaking on the brink of collapse. On the 4th of February 2010 quantitative easing programme was putted on hold, but MPC announced that economy remains slow-moving and Bank of England may start purchasing assets again if need be. Decision of halting quantitative easing was made because at the end of 2009 the UK economy went out of recession zone, UK GDP in the fourth quarter of 2009, the first time since the spring of 2008 showed growth - 0,1% - and the country entered a period of recovery of economic growth after the crisis. And there were no reason to inject more money into economy and to stimulate inflation.

There is an opinion that a policy of quantitative easing necessarily lead to inflation because of increase in money supply. Under the prospects in this case refers to the inflationary risks that may arise in the next few years. In particular, the February inflation report says that there are risks as in the case of continuation of this policy, and in case of weakening it.

Uncertainty about halting the quantitative easing remain, as the impact of austerity budget will manifest fully only in 2011. And if, as many expect growth will continue to slow, unemployment will rise, while expenses fell sharply, then the economy may require continued support from the monetary policy in the form of quantitative easing. Moreover, the result of the buying the assets would lead to the instant injection of the money to economy thereby providing the economy with an opportunity to spend more money. Additional injection of the liquid assets in the UK economy may lead to an increase in the economy by promoting companies to spend their money, on the other hand it can be very ineffective, fixed assets will settle in the bank reserves before reaching real sector. Increase in the liquidity would not be able to stimulate consumers demand and reduce unemployment, but may lead to huge increase in inflation rate. (Macnamara 2010)

George Buckley, UK economist at Deutsche Bank, said he thought the MPC was unlikely, although only just, to resume QE in the future. "While we think today's pause marks the end of the QE programme, the risk of a double-dip in economic activity - in the near-term due to higher VAT, the imminent end of the car scrappage scheme and inclement weather; in the longer term due to the need to reduce public and household sector debt - means that we can't fully write off the chance of further stimulus just yet." (Guardian 4th February 2010)


To avoid huge raise in the inflation rate Central Bank should make the process of injection money in the economy controlled, it should use this process infrequently, so that economy would be able to absorb the money injection. Quantitative easing is very useful tool in the hands of the Central Bank which helps it to react in the situations of the financial crisis, but it is very dangerous method to use in healthy economy.

This essay attempted to discuss the quantitative easing method and how it was used by different Central Banks in different countries. Further, it critically evaluated how quantitative easing model helped Bank of England to boost economy in the current financial crisis. And to what consequences this strategy may lead.


Ansgar Belke, Thorsten Polleit, Monetary Economics in Globalised Financial Markets, Springer, 2009.

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Gary Dorsch, Central Banks Detonate the Quantitative Easing Monetary Nuclear Option, Market Oracle, 2009, retrieved 11 December 2010, http://www.marketoracle.co.uk/Article9528.html

Grainne Gilmore, Bank halts 200$ billion money printing scheme, Sunday times, 2010, retrieved 8 December 2010, http://business.timesonline.co.uk/tol/business/economics/article7014801.ece

Jana Randow, ECB Expand Balance Sheet by 36 percent to revive Lending, Bloomberg, 2009, retrieved 10 December 2010, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBJp_FWQ6wIc

Jean-Claude Trichet, Reflections on the nature of Monetary policy non-standard measures and finance theory, ECB, 2010, retrieved 11 December 2010, http://www.ecb.int/press/key/date/2010/html/sp101118.en.html

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Kelly Macnamara, Bank of England halts quantitative easing scheme, The Independent,2010, retrieved 10 December 2010, http://www.independent.co.uk/news/business/news/bank-of-england-halts-quantitative-easing-scheme-1889508.html

Paul Krugman ,Japans Trap May 1998 retrieved 10 December 2010, http://web.mit.edu/krugman/www/japtrap.html

The guardian, Bank of England halts quantitative easing, retrieved 8 December 2010, http://www.guardian.co.uk/business/2010/feb/04/quantitative-easing-bank-of-england

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