Quantitative tightening

Quantitative tightening (QT) is a contractionary monetary policy applied by a central bank to decrease amount of liquidity within the economy. The policy is the reverse of quantitative easing aimed to increase money supply in order to stimulate the economy.[1] The QE policy was massively applied by leading central banks to counter the Great Recession that started in 2008. The prime rates were decreased to zero; some rates later went into the negative territory. For example, to fight with ultra-low inflation or deflation caused by the economic crisis, the European Central Bank, overseeing monetary policy for countries that use the euro, introduced negative rates in 2014. The central banks of Japan, Denmark, Sweden, and Switzerland also set negative rates.[2]

The main goal of QT is to normalise (i.e. raise) interest rates in order to avoid increasing inflation as it becomes expensive to access money and reduces demand for goods and services in the economy. Like QE before it, QT has never been done before on a massive scale, and its consequences have yet to materialize and be studied.[3]

Actions and policies

Central bankers apply the following actions to decrease the money supply:

  • A central bank may hold its current portfolio of bonds until maturity and not to buy new bonds.
  • A central bank may sell its current portfolio of bonds.
  • A central bank may increase prime rates.

An effect on asset prices

Whereas QE caused the substantial rise in asset prices over the past decade, QT may cause broadly offsetting effects in the opposite direction.[4]

See also

References

  1. ↑ Brookes, Marcus (October 18, 2017). "60 seconds explaining quantitative tightening". Schroders. schroders.com. Retrieved 24 May 2018.
  2. ↑ Soble, Jonathan (September 20, 2016). "Japan's Negative Interest Rates Explained". The New York Times. nytimes.com. Retrieved 24 May 2018.
  3. ↑ "What Is Quantitative Tightening?". FXCM. fxcm.com. Retrieved 24 May 2018.
  4. ↑ Webb, Merryn Somerset (23 April 2018). "What to do as quantitative easing becomes quantitative tightening". Money Week. moneyweek.com. Retrieved 24 May 2018.
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