Concept
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The role of central banks within financial markets is a point of contention. Historically, the role of central banks was to monitor and maintain monetary supply. However, due the devastation of the last financial recession in 2008, central banks were forced to step in as market makers by flushing economies with cash (a policy known as quantitative easing or QE) in order to prevent economies from stalling. The effects of the intensive global QE cycles are still evident today in the form low interest rates globally, and bond and equity sensitivity to interest rate hikes.
This sensitivity to increases in interest rates has proliferated in the global markets since the start and subsequent ‘tapering’ of QE. As mentioned above, QE refers to the act of flushing an economy with money. This injection of money into the economy is usually done by the central/reserve bank buying up billions of bonds from banks and other financial lending institutions in the economy.
This injection (supply) of money causes the cost of money to decrease due to principles of supply and demand. The cost of money is essentially inflation. In essence, after QE there is so much money in the economy that interest rates are low. When interest rates are low, it’s cheap to buy credit (due to lower interest repayments) causing companies to stock up on cheap credit.