QE meaning in Banking ?

Answer:

What is Quantitative Easing mean?

Quantitative easing (QE) is a monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets (i.e. municipal bonds, corporate bonds, stocks, etc.) in order to inject money into the economy to expand economic activity. Quantitative easing is considered to be an unconventional form of monetary policy, which is usually used when inflation is very low or negative, and when standard monetary policy instruments have become ineffective.

Similar to conventional open-market operations used to implement monetary policy, a central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. However, in contrast to normal policy, quantitative easing involves the purchase of riskier assets (rather than short-term government bonds) of predetermined amounts at a large scale, over a pre-committed period of time.

Central banks usually resort to quantitative easing when their nominal interest rate target approaches or reaches zero. Very low interest rates induces a liquidity trap, a situation where people prefer to hold cash or very liquid assets, given the low returns on other financial assets. This makes it difficult for interest rates to go below zero; monetary authorities may then use quantitative easing to further stimulate the economy rather than trying to lower the interest rate further.

Quantitative easing can help bring the economy out of recession and help ensure that inflation does not fall below the central bank's inflation target. However QE programmes are also criticized for their side-effects and risks, which include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term), or not being effective enough if banks remain reluctant to lend and potential borrowers are unwilling to borrow. Quantitative easing was undertaken by all major central banks worldwide following the global financial crisis of 2007–08, and again in response to the COVID-19 pandemic.

reference

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