All You Need To Know About Quantitative Easing

In April, Japan joined the rest of the developed world in launched an unprecedented quantitative easing programme, which, despite widespread scepticism about whether it will work, was given a stamp of approval by the Group of Seven (G7) finance ministers who met this weekend in the UK to discuss pressing world matters.

What is quantitative easing?

Central banks, for which life has become a lot more complicated, have embarked on a range of grand monetary policy stimulus measures.  At the forefront of this action is the use of forward guidance on interest rates and massive expansion in central bank balance sheets through quantitative easing (QE), which involves central banks printing money to buy large amounts of assets – in the hope that this will boost the economy.

Which countries have implemented quantitative easing programmes so far?

US, Europe, UK and Japan

What have these been?

US –

Quantitative Easing 1 (QE1) – November 25, 2008

• Introduced just after the global credit crunch hit, the US Federal Reserve bought some US$ 1.75tn worth of assets from March 2009 to March 2010 (US$300bn long-term Treasury securities, US$1.25tn mortgage-backed securities and US$175bn agency debt obligations).

Quantitative Easing 2 (QE2) – November 3, 2010

• QE2, introduced in November 2010, involved the purchase of US$600bn long-term Treasuries by end June 2011.

Operation Twist – September 21, 2011

• In September 2011, the Fed introduced the so-called “Operation Twist” aimed at increasing the average maturity of its security holdings and reducing Treasury yields at the long-end of the curve.

Quantitative Easing 3 (QE3 or Q∞) – September 2012

• This was an open-ended purchase programme of  agency mortgage-backed securities of US$40bn per month, which was implemented as from September 2012 and, the US Fed said, if the labour market does not improve substantially it would undertake additional asset purchases.  It has also been dubbed QE Infinity (Q∞) because no end date has been set.

Europe –

Long Term Refinancing Operations (LTRO) – December 21, 2011

• The European Central Bank announced long-term refinancing operations in late 2011 and early 2012 amounting to about €1tn, although some banks have repaid these loans early causing some shrinkage in the ECB balance sheet of late.

UK –

Quantitative easing – January 2009

• The Bank of England has committed a total of £375bn to QE so far. At a Bank meeting in early February, governor Sir Mervyn King’s tried to get agreement from other members of the committee to extend the programme of asset purchases to more than £375bn but was outvoted.

Japan –

Abenomics – December 2012

• A term being given to a suite of controversial – and aggressively expansionary – fiscal and monetary policy measures introduced by Japanese prime minister Shinzo Abe after his December 2012 reelection.

Quantitative easing – April 4, 2013

• In April this year, the Bank of Japan upped the ante when it surprised the financial markets with the scale of its planned balance sheet expansion. The Bank aims, roughly, to double the size of its monetary base to almost 60% of nominal GDP in a bid to end deflation and achieve a 2% inflation target by end2014. The Bank intends to buy not only Japanese government bonds but also ETFs and Japan real estate investment trusts with the stated intention of lowering risk premia of asset prices.