Quantitative Tightening (QT)

Quantitative tightening is when a central bank drains money it previously injected, either by selling the government bonds it bought or simply letting them mature without reinvesting. It is the reverse of quantitative easing.

Mechanically, when a central bank buys bonds the payment flows into the market and liquidity expands. When a bond matures and the proceeds are not reinvested, that money returns to the central bank and disappears. Repeated quietly, this shrinks the total money circulating in the system.

Why do it? Because rates alone are sometimes not enough. The policy rate moves short-term borrowing costs, but money injected over years lingers in long-term rates and asset prices. Tightening reduces that accumulated liquidity directly, pressing down on both inflation and asset froth, which is why rate hikes and quantitative tightening usually run at the same time.

The strain is real. As liquidity drains, risk assets feel it first, and property, REITs bought with leverage, and stocks priced on growth expectations rather than profits react most sharply. Markets therefore watch the pace of tightening, meaning how much is drained per month, and any signal about when it ends. Draining too fast can leave some corner of the system short of funding, so central banks generally proceed cautiously.