Quantitative tightening

Quantitative tightening

A process known as quantitative tightening, or QT, has drawn attention as central banks worldwide steadily shrink their balance sheets and remove liquidity from the financial system. This process has wide-ranging effects on financial markets, monetary policy, and economic stability, generating discussions and studies of its influence and possible threats. 

What is QT? 

A monetary policy instrument known as QT is used by central banks to shrink the size of their balance sheets and remove liquidity from the financial system. It contrasts with quantitative easing, or QE, which involves central banks buying assets to boost the economy.  

The amount of money in circulation is decreased in QT when central banks sell their assets, such as mortgage-backed securities or government bonds, or allow them to mature. After a period of monetary stimulus, QT aims to normalise monetary policy, avoid asset bubbles, and manage inflation. It might greatly affect interest rates, financial markets, and economic expansion. 

Understanding QT 

Central banks often reduce the size of their balance sheets and remove liquidity from the financial system as part of QT, which is frequently accomplished by taking steps like selling or not reinvesting securities that are about to mature that were bought during times of QE.  

QT attempts to manage inflation, normalise financial markets, and re-establish the central bank’s policy flexibility by lowering the amount of money in circulation and tightening monetary conditions. The QT process is typically slow and carefully controlled to prevent significant economic and financial market disruptions. 

Risks associated with QT 

The following are the risks of QT: 

  • QT may cause financial markets to become more volatile due to the lack of liquidity. A sudden shift in the amount of money available can lead to major price adjustments and destabilise the value of assets. 
  • Lowering central bank balance sheets that quantitative tightening normally entails can increase interest rates. Increased borrowing rates may affect consumers and businesses, thereby reducing economic development. 
  • QT might reveal flaws in the financial system, especially if there are high levels of debt or if some industries or institutions depend largely on central bank liquidity. 
  • Major central banks’ QT may impact other countries’ economies and financial markets. Exchange rates, capital flows, and financial stability can all be impacted by changes in interest rates and liquidity circumstances in one country. 
  • An economic downturn might happen if QT is conducted too forcefully or at the wrong moment. Reduced consumer spending, company investment, and general economic activity may be consequences of less liquidity and higher borrowing rates. 

Benefits of QT 

The following are the benefits of QT: 

  • QT tries to curb inflation and reduce the dangers of overly accommodative monetary policy. To assist in preserving price stability and avoid the emergence of inflationary forces, the central bank might shrink its balance sheet and remove liquidity from the market. 
  • QT can be used to combat financial market excess risk-taking and possible asset bubbles. It can deter speculative behaviour and encourage more sensible investment decisions by restricting the availability of cheap and abundant liquidity. 
  • With the help of QT, central banks may normalise their monetary policies and make room for future changes. Central banks can reclaim their capacity to respond to impending economic crises and execute necessary policy changes by lowering the size of their balance sheets. 
  • QT aids in the normalisation of financial markets after monetary easing and expansionary policies. It attempts to improve capital allocation efficiency and return market conditions to a more stable level by lowering reliance on central bank assistance. 

Example of QT 

The steps taken by the US Federal Reserve in the wake of the 2008 global financial crisis serve as an example of QT. The Fed started QT to dismantle its balance sheet after years of using QE to boost the economy and support financial markets.  

The Fed started progressively decreasing its holdings of Treasury securities and mortgage-backed assets, which were gathered during the QE programmes, starting in October 2017. This shrinkage of the Fed’s balance sheet was an instance of QE. The Fed permitted some of these securities to mature as part of the QT procedure without reinvesting the profits.  

The Fed’s holdings and the total amount of liquidity available in the financial system gradually decreased due to the steady decline in the reinvestment of maturing assets. The Fed’s QT illustrates the effort the central bank is making to normalise monetary policy and gradually reduce the extraordinary stimulus it supplied during the crisis. With little impact on the financial markets or the overall economy, it attempted to shrink the balance sheet. 

Frequently Asked Questions

QT entails reducing a central bank’s balance sheet by selling or letting previously acquired assets, such as government bonds, mature, which tightens monetary conditions by lowering the money supply and draining liquidity from the financial system. 

The duration of QT varies and is determined by national policy and economic circumstances. Depending on their goals and assessments of the economy, central banks may execute QT for a few months to many years. 

Depending on their financial situation, different people may experience different repercussions from QT. QE is the exact opposite of QT. The Fed executes QT by selling treasury bonds or allowing them to mature and be removed from its cash reserves. Thus, QT can cause financial markets to become unstable, which might lead to an international economic catastrophe. Additionally, higher interest rates, fewer lending options, and potential effects on asset prices and investment returns are all possible outcomes. 

QE entails purchasing financial assets to increase the economy’s liquidity. QT requires reducing such assets to remove liquidity from the financial system. 


When a central bank shrinks its balance sheet and removes liquidity from the financial system, this is referred to as QT. Tapering describes a central bank’s progressive slowing down of its pace of asset purchases as part of its quantitative easing programme. 

Related Terms

    Read the Latest Market Journal

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 35 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 52 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 92 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 172 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 93 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 124 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Why 2024 Offers A Small Window of Opportunity and How to Position Yourself to Capture It

    Published on Mar 28, 2024 171 

    With the Federal Reserve (FED) finally indicating rate cuts in 2024, we witnessed a significant...

    Weekly Updates 25/3/24 – 29/3/24

    Published on Mar 25, 2024 75 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com