What is quantitative easing?

Story link: What is quantitative easing?

In a nut shell, quantitative easing is explained below, but it is not as simple as just injecting £billions into banks.

Quantitative easing includes central banks collaborating with the private banks and taking over some of their assets for a cash sum, allowing the private banks to have some day to day cash flow.

What is quantitative easing?

What is quantitative easing?
It is a way of pouring money into a cash-starved banking system. The central bank buys assets, typically government bonds, from private banks in the financial markets. They get cash in exchange, helping them to build up their reserves – and the hope is that they then lend some of it out to families and businesses.
At the same time, driving up the price of bonds reduces their yield, and in effect the interest rate. And as interest rates across the economy are set in relation to gilt yields, quantitative easing acts as an extra lever pushing down borrowing costs.
So is that what Mervyn King is going to do now?
No. This is not quite traditional quantitative easing – what King recently called “conventional unconventional measures” – for two reasons. One, instead of buying plain old government bonds, the Bank is targeting its fire on particular markets where it thinks there is a shortage of buyers. By acting as a willing buyer, it hopes to drive up the price of these assets, and get credit moving again.
Secondly, the Treasury has said it will pay for this first £50bn buying spree by selling new government bonds. It will therefore be taking as much cash out of the market as it is pouring in, so there should be little risk of inflation.
Also, the Bank of England hasn’t yet run out of ammunition – rates are still at 1.5%. But we’re in uncharted territory, so officials in Threadneedle Street and No 11 have been in close contact.