Are Rate Cuts and Quantitative Easing the Same Kind of Easy Money?

Rate cuts begin at the short end of the market. A policy rate is the very short-term interest rate that a central bank uses as its monetary-policy reference. When it falls, banks may face lower funding costs. Deposit rates, variable loan rates, and short-term market rates may then move lower. Households and businesses could spend or invest more if their interest bills fall.

That is only a possible path. A half-percentage-point policy cut does not make every loan rate fall by the same amount on the same day. Banks still assess income, collateral, default risk, and market stress. If the extra rate charged for credit risk rises, a borrower's final rate may barely change.

How bond buying can affect long-term rates. Quantitative easing, usually called QE, is a policy in which a central bank buys financial assets such as government bonds on a large scale. The Bank of England says it turned to QE in 2009 when its policy rate was already very low and there was little room to cut it further.

Central-bank buying tends to raise a bond's price. An investor then pays more for the bond's promised interest payments and repayment at maturity, so its yield moves lower. Long-term government-bond yields are reference rates for mortgages, corporate bonds, and other borrowing. Investors who sell bonds may also move the cash into other assets, a process called portfolio rebalancing.

More central-bank reserves do not automatically mean more household loans. A central bank can pay for bonds by creating central-bank reserves. These reserves are settlement money that commercial banks hold at the central bank. They are not cash deposited directly into every household account.

A bank with more reserves may still make fewer loans if customers do not want to borrow or if the bank expects more defaults. Credit supply means the amount of loans and financing that lenders actually make available to households and businesses. To judge the economic effect of QE, look beyond reserves to loan approvals, bond issuance, borrowing rates, and spending.

The same rate movement can follow a different path. Consider a hypothetical policy-rate cut of 0.5 percentage points. If a household's variable loan rate falls by 0.3 percentage points on a loan balance of 200 million won, its annual interest bill falls by about 600,000 won, with everything else unchanged. That is a direct example of a short-term policy price passing into a bank loan.

Now suppose bond purchases are followed by a 0.3-percentage-point fall in a ten-year government-bond yield. The next question is whether new mortgages and corporate bonds became cheaper and whether borrowers actually raised funds. These figures are hypothetical and do not describe current market rates.

The effects and burdens can appear in different places. A rate cut can change the interest paid by savers and borrowers relatively quickly. QE may first move long-term bonds and other asset prices. Its effects can therefore differ between people who own financial assets and those who do not.

QE also does not have a fixed impact each time it is used. The Bank of England says its bond purchases were particularly effective at lowering long-term borrowing costs during periods of market stress, while the impact varied across rounds. Read each policy by asking what the central bank changed, which rates moved, and whether borrowing and spending followed.