A central bank buys bonds at scale:new money flows to fill the sail.
A monetary policy tool in which a central bank purchases government bonds or other financial assets with newly created money, which tends to lower yields.
Its effect on the currency does not run in a fixed direction: it also depends on what other central banks are doing and on what the market already expected.
In plain words
Quantitative easing, or QE, is when a central bank creates new money and uses it to buy large amounts of assets, usually government bonds, from the market. The buying pushes bond prices up, which pushes down their yields (the interest return a buyer receives), and it leaves banks holding more cash.
See it move
Stage 3 of 4: Bond prices up
Why it matters
QE changes the yields available in a currency, and differences in yield between countries are one of the things exchange rates respond to. Announcements about starting, slowing or ending such purchases are therefore events that currency markets watch closely.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A bond pays a fixed 30 a year and trades at 1,000 before a central bank begins buying.
- 1Yield before30 ÷ 1,000 = 3%.
- 2Heavy buying lifts the bond’s price to 1,200.
- 3Yield after30 ÷ 1,200 = 2.5%.
The bond’s payment has not changed, but a new buyer now earns 2.5% instead of 3% because the price is higher.
A common mistake
It is often said that QE weakens a currency. Lower yields can have that effect, but exchange rates also depend on what other central banks are doing and on what the market already expected, so the currency does not move in a fixed direction.
Check yourself
Learn more
- Academy lessonCentral bank policyWho the major central banks are, how rate decisions, quantitative easing and forward guidance work, and how policy feeds through to currencies.
- ExplainerHow central bank decisions move currenciesRates, forward guidance and balance-sheet policy reach exchange rates through one channel above all: what the market expected beforehand.
Educational information, not investment advice or a recommendation to trade.