Monetary Policy - What is Quantitative Tightening?

Quantitative tightening (QT) is a deflationary monetary policy set by a nation’s central bank. QT is the opposite of quantitative easing (QE).

It involves selling government bonds to banks or the central bank letting bonds mature and then removing them from their balance sheet.

When the central bank buy bonds from banks, this reduces liquidity, or money, from financial markets & might then limit the value of bank lending.

If the central bank is no longer acting as a purchaser of new issues of bonds, this fall in demand might cause bond prices to drop.

As a result, the yields on government bonds will move higher. Consequently, other market interest rates might rise too.

This could include mortgage interest rates. Higher loan costs in theory will lower demand for credit in the financial system.

Evaluation Points

1. Quantitative tightening has – thus far – been modest – involving only a small fraction of the bonds purchased during a decade of quantitative easing.
2. Central banks will use QT with caution – if they remove liquidity too quickly, this can spook financial markets, resulting in erratic movements in the bond or stock market
3. The main aim of quantitative tightening is a normalisation of monetary policy including moving base interest rates away from the zero bound