What is quantitative easing?

Quantitative easing refers to a monetary policy strategy used by central banks to stimulate the economy by purchasing financial assets, such as government bonds and mortgage-backed securities. This process aims to increase the money supply available in the financial system, lower interest rates, and encourage lending and investment. By buying these assets, central banks inject liquidity directly into the economy, which can help to boost economic growth during periods of low inflation and sluggish economic activity.

This approach stands in contrast to conventional monetary policies that typically involve raising interest rates to control inflation or reduce spending. Instead, quantitative easing is employed when traditional methods have been exhausted, particularly in a low-interest-rate environment where further rate cuts are not feasible. Hence, it acts as a critical tool for central banks to support the economy when facing economic downturns, making the choice of buying financial assets to inject money into the economy clearly the correct understanding of quantitative easing.