How quantitative easing works

Three misconceptions about quantitative easing

First, the Bank is not printing bank notes to buy government bonds.

To pay for the bonds, we issue a unique type of liability to match up with the new assets (i.e., the bonds) on our balance sheet. These are called settlement balances, and we pay interest on them, just like commercial banks pay interest on deposits at their institutions. So, QE expands our balance sheet but not the amount of cash in circulation.

Second, QE doesn’t mean that we are financing government spending and debt at no cost.

With QE, we are simply lowering the cost of borrowing for the government—just as we are for households and businesses. The government will have to repay the bonds that we buy through our QE program when they are due.

Third, using QE doesn’t risk sparking high inflation.

A key reason we are using QE is that we currently face the opposite problem—low inflation.

Once inflation is back at our 2 percent target, we have the tools we need to keep it in check. And Canadians expect that inflation will stay around 2 percent, which also helps to keep it on target. Most important, the way we approach our QE program—including when and how we scale it back—will always be tied to the outlook for inflation.

News – Bank of Canada