I have blogged quite a lot on QE – Quantitative Easing – which has been extremely prevalent in the developed world. However, what about QT – Quantitative Tightening? Remember:
QE – putting more money in the circular flow to stimulate demand
QT – taking money out of the circular flow to slow down the economy
According to the Business Insider website the developing world are trying to slowdown their economies. Here are some approaches from central banks:
The Chinese strategy is the most well known, as the PBOC has been trying to slow down credit growth through a series of bank reserve requirement ratio (RRR) hikes. Therefore if the RRR rate goes up it means that the bank has to hold more cash in reserve and has less to lend out.
They have increased their IOF tax – the IOF tax applies upon conversion of foreign currency into Brazilian reals related to equity or debt investments by foreign investors on the Brazilian stock exchange. This dampens the Carry Trade and means less speculative money is put into the Brazilian Real. They have also increased the reserve requirement in banks to reduce liquidity in money markets to slow economic activity in the market.
Carry Trade – a situation where an investor borrows money in one country that has very low interest rates and then invests it in another country with higher interest rates. This can be precariuous as exchange rates vary.
Here interest rates and reserve ratio requirements have actually gone in different directions.
Reserve requirements have climbed 8% for deposits maturing up to three months. These changes affect institutions with a local presence in Turkey. In order to sharply reduce the incentives for foreign players sending portfolio flows into Turkey, the policy rate was cut by 0.75% in conjunction with reserve requirement hikes in order to weaken the currency. The signaling aspect of such a cut has clearly played a strong role in driving market perception because investors tend to see Turkey’s monetary policy as expansionary. However, the net result of QT and policy rate cuts has likely been to make Turkish monetary policy tighter, not looser.