Quantitative Tightening (QT)

Quantitative tightening is the reverse of quantitative easing. After years of buying bonds to support the economy, central banks may decide to reduce their holdings once the economy has recovered or inflation has risen.

QT can be carried out in two ways. The central bank can let bonds mature without reinvesting the money it receives, which gradually shrinks its holdings. Or it can actively sell bonds in the market, which reduces holdings more quickly.

For example, a central bank holding large amounts of government bonds might stop reinvesting the proceeds from maturing bonds, allowing its holdings to fall by a set amount each month.

QT tends to push long-term interest rates higher, because the central bank is no longer a major buyer of bonds. It works alongside interest rate increases to tighten financial conditions and reduce inflation. Central banks usually carry out QT gradually and with advance notice, because the effects on markets are uncertain and sudden moves could cause financial instability.