This week we are taking a look into Quantitative Tightening (QT) which the Bank of England (BoE) has been planning to undertake to bring the UK’s spiralling inflation under control.

Quantitative Easing

Before we get into what QT is, we need to start with its opposite - quantitative easing (QE).

QE is a form of monetary policy used by central banks to increase the domestic money supply and spur economic activity. That’s usually achieved by buying government bonds (gilts). The price of these bonds tends to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down.

The BoE began buying bonds through QE in March 2009 as a response to the Global Financial Crisis after already slashing interest rates from 5 to 0.5 per cent. Between 2009 and 2021, £895 billion worth of bonds were bought through QE. A huge chunk of that was bought in the last two years to fund the support for the UK economy during the pandemic.

Most of the total £875 billion went into buying UK government bonds. The much smaller part (£20 billion) was used to buy UK corporate bonds.

Quantitative Tightening

The BoE has to perform a balancing act to fight inflation (currently 8.6%) and ensure financial stability. The abundance of money in the financial markets after a long period of QE has also fuelled consumer demand and in turn, increased the price of goods and services (inflation).

Quantitative Tightening (QT) is the exact opposite of QE. It’s a process through which central banks reverse, or ‘unwind’, their QE. Thus, the BoE is looking to introduce QT by restricting the supply of money by selling those bonds or letting them mature, and removing them from its cash balances.

Both QT and increasing interest rates are the Bank of England’s methods to contain escalating inflationary forces

When to implement the QT?

We don’t know yet. The BoE had to use more QE recently to stabilise the volatile bond market after gilt prices plummeted exposing UK pension funds.

The BoE originally planned to start QT in early October but pushed the launch back until Oct. 31 as it launched its emergency bond-buying programme. For now, it seems the Bank’s hand is forced by the turbulent markets before it introduces QT

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