What Is Quantitative Tightening and How Does It Work?

 

Quantitative tightening (QT) is a contractionary monetary policy instrument that central banks employ to lower an economy’s level of liquidity, money supply, and overall economic activity.

You may be wondering why a central bank would want to slow down economic activity. When the local economy overheats and inflation, or the overall rise in the cost of goods and services commonly bought there, occurs, they reluctantly do so.

The Benefits and Drawbacks of Inflation

Because a steady rise in the overall level of prices is essential to healthy economic development, most industrialized countries and their central banks have a modest inflation goal of approximately 2%. The essential concept here is “steady,” which makes forecasting and long-term financial planning for both people and organizations simpler.

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