Quantitative tightening

After a period of quantitative easing, a central bank holds a large portfolio of bonds, funded by reserves it created. Quantitative tightening reduces that portfolio. The gentler method is passive: when bonds mature, the central bank does not reinvest the proceeds, so its holdings run off over time. Some central banks, including the Bank of England, have also sold bonds back to the market before they mature. Either way, the reserves created during quantitative easing shrink, and private investors must absorb a larger share of government debt.

Quantitative tightening is intended to work quietly in the background, while the policy rate remains the main tool for setting monetary conditions. Even so, by adding to the supply of bonds that private buyers must hold, it can put upward pressure on longer-term yields, and draining reserves too far can cause strains in short-term money markets, which central banks watch closely. Because many of the bonds were bought at higher prices, selling them or holding them to maturity can crystallise losses for the central bank, which in some countries are covered by the government.