Research Briefing | Jun 6, 2022

Beware of quantitative tightening, a little goes a long way in global stock markets

iPad Frame Research ReportThe quantitative easing (QE) programmes undertaken by the leading global central banks since the global financial crisis (GFC) have changed the relationship between money and stock prices profoundly. Money now matters more. And while stock markets have priced in quantitative tightening (QT) well before its launch, plenty of holdings remain on central bank balance sheets.

QE programmes have pushed excess liquidity to new heights. Through buying government (and corporate) securities outright, central banks have created a huge monetary base, increasing the big five balance sheets by US$12 trillion since the pandemic. Banking systems have then created more money stocks by credit creation, adding about US$23 trillion to the largest 10 economies.

Both the monetary base and credit impulse have since turned the corner, but plenty is still in the system. True, vast monetary base creation produces less and less effect in terms of total liquidity as credit demand is finite, but global liquidity is still excessive as seen in record-high voluntary bank reserves and reversed repo operations.

What you will learn:

  • Global liquidity is still excessive but retreating: Now that the US stock market is hovering around the official definition of a bear market (declining 20% from its January peak), one might wonder about the role money or excess global liquidity plays in this.
  • Money velocity is slowly picking up: Part of this is a consequence of simple maths. In a recession GDP falls but money stock does not automatically adjust (nor would you want it to), so that the result is inevitably a decline in velocity.
  • The more liquidity in the system, the bigger QT is needed for the same effect: The effect of liquidity on asset prices changes over time, too. It has generally become weaker as liquidity becomes more abundant. 
Back to Resource Hub

Related posts


Government debt issuance set to dwarf ECB reinvestments

Reinvestments from the ECB's asset purchase programmes, a key monetary policy instrument going forward, could offer important support for smaller periphery sovereigns, but not much for Italy or Spain.

Find Out More
black and white photo of martin place sydney


RBA yield target capitulation signals tighter policy

The RBA’s yield curve targeting experiment ended this week not with a bang but a whimper. Market expectations for a cash rate hike, fuelled by stronger than- expected inflation data, pushed yields well beyond the RBA’s 0.1% target for the April 2024 bond. In a relatively thin market, the RBA had little choice but to let the target fold, at the cost of some credibility in financial markets.

Find Out More


Higher energy prices won’t derail the global recovery

The global recovery from the pandemic will be dented but not derailed if high energy prices persist throughout 2022, our modelling finds. In an extreme scenario where oil, gas and coal prices remain elevated indefinitely, global growth would still be 4.0% and 2.8% in 2022 and 2023 respectively, knocking 0.5ppts and 0.7ppts off our baseline forecast.

Find Out More