For the most part, when people think about the Bank of England and what it does to control the economy, they think about interest rates.
And that’s quite understandable. After all, influencing inflation by raising or lowering the prevailing borrowing costs across the UK has been the Bank’s main tool for the vast majority of its history. There are data series on interest rates in the Bank’s archives that go all the way back to its foundation in 1694.
But depicting the Bank of England as being mostly about interest rates is no longer entirely true. For one thing, these days it is also in charge of regulating the financial system. And, even more relevant for the wider economy, it is engaged in another policy with enormous consequences – both for the markets and for the public purse. But since this policy is pretty complex, few outside of the financial world are even aware of it.
Money latest: What interest rate hold means for you
That project is quantitative easing (QE) or, as it’s better known these days, quantitative tightening (QT).
You might recall QE from the financial crisis. It was, in short, what the Bank did when interest rates went down to zero and it needed an extra tool to inject some oomph into the economy.
That tool was QE. Essentially it involved creating money (printing it electronically) to buy up assets. The idea was twofold: first, it means you have more money sloshing around the economy – an important concept given the Great Depression of the 1930s had been associated with a sudden shortage of money. Second, it was designed to try to bring down the interest rates prevailing in financial markets – in other words, not the interest rate set by the Bank of England but the yields on long-dated bonds like the ones issued by the government.
