During Quantitative Tightening (QT), a central bank actively purchases government bonds from commercial banks, thereby increasing bank reserves to encourage credit creation.

An increase in the policy interest rate typically leads to hot money outflows, which depreciates the exchange rate and lowers the domestic price of imported raw materials.

A rise in the central bank's policy interest rate increases the cost of borrowing and the reward for saving, which dampens consumption and investment, thereby helping to curb demand-pull inflation.

To prevent systemic failure, the central bank in its role as lender of last resort is legally obligated to provide interest-free loans to any insolvent financial institution to protect its shareholders.