Is quantitative easing inherently inflationary? An evaluation

Introduction

When the Bank of England began quantitative easing in 2009, critics warned that creating money on such a scale would inevitably lead to high inflation. For more than a decade, consumer price inflation instead remained close to or below target. When inflation did surge after 2021, the same argument returned. This essay evaluates whether quantitative easing is inherently inflationary and argues that it is not: its inflationary effect depends on the state of the economy and on what else is happening to demand and supply at the same time.

How quantitative easing works

Under quantitative easing, a central bank buys financial assets, mostly government bonds, paying with newly created reserves. Joyce et al. (2012) identify several channels through which this might affect the economy. Portfolio rebalancing raises asset prices and lowers long-term yields as sellers of bonds buy other assets. Signalling reinforces expectations that interest rates will stay low. A liquidity channel operates when markets are dysfunctional, as in 2009 and March 2020.

None of these channels increases spending in the economy directly. Each works by making borrowing cheaper or wealth larger, which only raises prices if households and firms respond by spending more than the economy can produce.