Generally, a lot of the governments around the world including the UK government borrow money by issuing government bonds or government’s gilts to the financial market. Investors trade these bonds on the financial market regularly. When there is an economic crisis, central banks such as the Bank of England produce a lot of digital currency (similar to printing cash money) in order to buy these government bonds from the financial market. For instance, the Bank of England buys £5 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £5 million in cash.
As a result of this, the price of these bonds tends to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down. This helps financial institutions such as banks to have a lot of cash to lend to the public. It also helps to decrease the interest. For example, the price of a government bond is trading at £1 with a 3% fixed interest rate (coupon) in the financial market. If the government purchases this bond from the market at £1.20 then the interest rate will be reduced to 2.5 % (3%/£1.2). Therefore, the interest rate is reduced by .5% because of the increase in bond price (from £1 to £1.20).
When there is a lot of cash that is held by financial institutions such as banks they tend to lend more money to the public. If the interest rate is very low and lending such as mortgages are easily available to the public then the demand for assets goes up too. Higher demand means higher prices. This stimulated demand drives property prices to increase dramatically. House prices in the UK were increased by almost 10% in 2021 although the Covid-19 pandemic was hitting the country high.
