QE, Interest Rate, Inflation, Currency and Stock Price

Quantitative Easing (QE) is a type of monetary policy that central banks used to stimulate economy. By implementing QE, central banks purchase a preset quantity of bonds or other financial assets from commercial banks or other private financial institutions. This short article will explains the impact of QE in various aspects:

Yields / Interest Rate: By purchasing bonds and financial assets, the price of these assets will increase and the yield of these assets will therefore be lower (as Yield = Coupon Amount / Price). The lower rate will encourage borrowing.

Money Supply and Inflation: One intention of QE is to encourage lending from banks in order to stimulate the economy. If banks do lend out the excessive reserves, the money supply will increase and consequently lead to inflation and expectations for future inflation.

Currency: The lower interest rate will lead to capital outflow from the economy and thus weaken the currency. The increase in money supply depreciates the currency as well. This will benefit exporters and debtors.

Further Readings:

Above are simply qualitatively illustrations of the relationship of these factors. In reality, the problem can be far more complex. We strongly recommend you do further research if you find this topic interesting.

Quantitative Easing Is Ending. Here’s What It Did, in Charts. by Neil Irwin. 

Quantitative Easing on Wikipedia

Interest Rate on Wikipedia

 

 

 

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