The signaling effect refers to the situation in which a central bank sends out a signal to the market through an expansion of the balance sheet, which leads to expectations that the future path of short-term interest rates will remain low for a longer period.
Since central banks can control the future path of short-term nominal interest rates, the expansion of the balance sheet signals the Bank’s future monetary policy conduct. Such expectations then affect various expectations for longer-term interest rates and the yields of other financial assets in the financial markets.