Macro & Central BanksQEAsset Purchase Programme
Quantitative Easing (QE)
Large-scale central bank purchases of financial assets, paid for with newly created reserves, used to ease policy once rates are near zero.
What Quantitative Easing (QE) means
Quantitative easing is a policy in which a central bank buys financial assets, typically government bonds and sometimes mortgage or corporate securities, and pays for them by crediting newly created reserves to the accounts commercial banks hold with it. It is normally deployed when the policy rate is already at or near its effective lower bound and conventional cuts are no longer available. By taking duration out of the market, the central bank pushes bond prices up and yields down along the curve, and encourages investors to rebalance into riskier assets.
For currencies the effect usually runs through yields and risk appetite. Compressing domestic yields narrows the interest rate differential against other currencies, which tends to weaken the currency, while the associated support for risk assets often lifts higher-beta currencies against traditional havens. Two caveats are worth remembering. Announcement effects are frequently larger than the effects of the purchases themselves, because markets price the programme immediately. And expanding the balance sheet is not the same as expanding the money supply in the hands of the public.
Worked example
If a central bank announces a larger than expected purchase programme, ten-year yields might fall by twenty basis points and the currency weaken by roughly one percent against the dollar on the day. Illustrative hypothetical figures.
Related terms
- Quantitative Tightening (QT)The reverse of quantitative easing: a central bank shrinking its asset holdings, usually by letting bonds mature without reinvesting.
- TaperingGradually reducing the pace of a central bank's asset purchases, which is still easing, just less of it each month.
- Central BankThe public institution responsible for a currency's monetary policy, issuance and financial stability.
- Bond YieldThe annual return an investor earns on a bond given its price, which moves inversely to the bond's price.
- DovishDescribes a policymaker or statement leaning toward looser monetary policy to support growth and employment, usually currency-negative.
Frequently asked questions
What does Quantitative Easing (QE) mean in forex trading?
Large-scale central bank purchases of financial assets, paid for with newly created reserves, used to ease policy once rates are near zero.
How does Quantitative Easing (QE) work in practice?
For currencies the effect usually runs through yields and risk appetite. Compressing domestic yields narrows the interest rate differential against other currencies, which tends to weaken the currency, while the associated support for risk assets often lifts higher-beta currencies against traditional havens. Two caveats are worth remembering. Announcement effects are frequently larger than the effects of the purchases themselves, because markets price the programme immediately. And expanding the balance sheet is not the same as expanding the money supply in the hands of the public.
What is an example of Quantitative Easing (QE)?
If a central bank announces a larger than expected purchase programme, ten-year yields might fall by twenty basis points and the currency weaken by roughly one percent against the dollar on the day. Illustrative hypothetical figures.
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