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Quantitative Easing (QE): Impact & strategy | Skilling

Quantitative Easing (QE): A blue block with numbers on it placed on a blue background.

Quantitative Easing (QE) is a monetary policy tool used by central banks to stimulate the economy when traditional monetary policy has become ineffective. By purchasing government securities and other financial assets from the market, central banks aim to lower interest rates, increase the money supply, and encourage lending and investment.

This article looks into the definition, objectives, risks, and examples of QE, with a particular focus on its relevance to investors in Argentina.

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Definition of QE

QE is a form of monetary policy where the central bank purchases securities from the open market to inject liquidity into the banking system, thereby reducing interest rates and encouraging banks to lend more. This increase in money supply aims to spur economic activity by making borrowing cheaper for businesses and consumers.

For Argentina, understanding QE's global impact is crucial, given the country's exposure to international financial markets and its economic challenges. QE policies in major economies can influence global interest rates, commodity prices, and capital flows, directly affecting Argentine investors and the broader economy.

QE Objectives

  • Stimulate economic growth: By lowering interest rates and increasing the money supply, QE encourages spending and investment.
  • Combat deflation: QE can help prevent deflation by increasing the money supply and raising inflation to a target level.
  • Support financial markets: Buying securities supports asset prices, which can stabilize financial markets during times of stress.

QE Risks

  • Inflation: An excessive increase in the money supply can lead to inflation if not carefully managed.
  • Currency devaluation: QE can lead to the devaluation of the national currency, affecting import prices and potentially leading to inflation.
  • Asset bubbles: Prolonged low interest rates and excess liquidity can lead to asset bubbles in markets such as real estate and stocks.

Countries that have used QE

Experts advocate for the use of QE in economies where the bank interest rate, the discount rate, and/or the interbank interest rate are close to zero, as it provides an alternative means to stimulate economic growth when traditional monetary policy tools have limited impact.

1. Japan: Japan's use of QE began in the early 2000s to counter deflation and stimulate economic growth. The Bank of Japan's aggressive asset purchase program aimed to increase the money supply and encourage inflation, setting a precedent for QE as a monetary policy tool.

2. United States: The U.S. Federal Reserve implemented QE in response to the 2008 financial crisis, purchasing large amounts of government securities and mortgage-backed securities to lower interest rates and increase liquidity in the financial system. QE programs continued in various forms to support the economy during periods of slow growth and the COVID-19 pandemic.

3. United Kingdom: The Bank of England introduced QE in 2009 to mitigate the effects of the global financial crisis. By buying government bonds and other securities, the BoE aimed to lower borrowing costs and stimulate investment and consumption.

4. Eurozone: The European Central Bank (ECB) launched its QE program in 2015 to combat deflation and promote economic recovery within the euro area. The ECB's asset purchases included government bonds, corporate sector securities, and asset-backed securities.

5. Canada: The Bank of Canada adopted QE measures for the first time in March 2020 in response to the economic impact of the COVID-19 pandemic. The program aimed to support the functioning of financial markets and provide liquidity to the Canadian economy.

6. Australia: The Reserve Bank of Australia commenced its QE program in November 2020, targeting government bonds to lower interest rates across the yield curve and support the Australian economy during the pandemic.

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FAQs

How does QE differ from traditional monetary policy?

Unlike traditional monetary policy, which adjusts the central bank's interest rates to influence economic activity, QE directly increases the money supply by purchasing assets. It's typically used when interest rates are already near zero and cannot be lowered further.

Can QE lead to inflation?

Yes, by increasing the money supply, QE can lead to inflation if too much money chasing too few goods. However, central banks closely monitor inflation rates to adjust their QE programs accordingly.

How do central banks decide when to start or stop QE?

Central banks start QE when the economy is weak, and traditional monetary policy tools are ineffective. They may decide to stop or reverse QE when the economy shows signs of strong growth, rising inflation, or if there are concerns about asset bubbles.

Has QE been successful in achieving its goals?

The success of QE varies by country and economic context. In some cases, QE has helped to stabilize financial markets, support economic recovery, and prevent deflation. However, critics argue that QE can also lead to income inequality and asset bubbles.

What impact does QE have on the stock market?

QE generally has a positive impact on the stock market. Lowering interest rates makes bonds and savings less attractive compared to stocks, leading to increased investment in equities and higher stock prices.

How does QE affect the average consumer?

For consumers, QE can lead to lower borrowing costs for mortgages and loans, stimulating spending. However, it can also reduce savings returns and, if it leads to inflation, decrease purchasing power.

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This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.

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