Question

What effect does quantitative easing have on the interest rate?

Answer 1

Quantitative easing (QE) has a profound effect on the economic-prevailing interest rates. Fed can use it as an alternative to the interest-rate policy. But it ends up affecting interest rates even more in the end. It is said that the relationship between the policy on quantitative easing (QE) and interest rates is fairly simple. At first, the policy on quantitative easing (QE) leads to a reduction in interest rates, i.e. the interest rates fall in the short and medium term. The interest rates, however, are going up dramatically in the long term. Long-term can be defined as a period of 5 years or more, for our reason.

Central banks typically only pursue policies on quantitative easing (QE) once the other options have been exhausted. This means that quantitative easing (QE) is used only when the interest rates are already close to zero and can not be lowered much further. In such a case there are two kinds of anticipations for market participants. The first is that the government should keep interest rates unchanged whereas the other assumption is that the interest rate may be increased by the central bank.