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Quantitative Easing & Quantitative Tightening

What is meant by Quantitative Easing?

Quantitative Easing (QE) is when the central bank of a country buys securities from the broader market to increase the supply of money so that interest rates can be brought down. The sellers of these securities are usually banks and other large financial institutions. Now when they sell these securities and the central bank buys from them, they get money. They are therefore more likely to increase the loans that they give, and at lower interest rates. This in turn gives a boost to the economy.

Like any other good, the cost of money (the interest rate) is also based on demand and supply of money. When demand for money is more than its supply, interest rate goes up. When demand for money is less than its supply, interest rate goes down.

The securities that a central bank sells in Quantitative Easing include government bonds, bonds of private companies, asset backed securities etc.

What is meant by Quantitative tightening?

Similarly, when a central bank intends to reduce the supply of money, and raise interest rates, it goes for quantitative tightening. In quantitative tightening, it sells securities in the broader market. Banks and other financial institutions buy these securities and in turn pay money to the central bank. The supply of money in the economy is thus reduced. With decrease in supply of money, interest rates go up. The purpose behind raising interest rates through Quantitative tightening is to slow down the economy so that inflation rate is brought down.

How do Quantitative Easing & Quantitative tightening affect the interest rate that you pay on your loans?

It must be clear to you by now. When a central bank, like RBI, goes for Quantitative Easing, interest rates go down. When it goes for Quantitative tightening, interest rates go up. The interest rates on your gold loans, business loans, home loans etc. goes down with quantitative easing. And they go up with quantitative tightening.

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