Open Market Operations
The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.
Open market operations are the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves meeting the demand of base money at the target rate by buying and selling government securities, or other financial instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation.BB mainly injects or withdraws reserves from the banking system through open market operations (OMO). This is pursued in two ways: The first type is the outright purchase or sale of approved securities through weekly auctions in volumes consistent with the growth paths for RM and M2 targeted in the annual monetary program. BB injects reserves into the banking system by purchasing approved securities and withdraws reserves from the banking system by selling them. By adjusting the amount and the officially acceptable interest rate at auctions, BB influences the successful bidding rate, and the subsequent public announcement of this rate can convey its intention regarding short-term interest rates. For instance, if BB intends to raise short-term interest rates, it increases the scale of its auction in absorbing operations and raises its internally acceptable bidding rate so as to push up the successful bidding rate of the auction and thus mop up excess liquidity from the banking system, which influences short-term interest rates. Any significant changes in the interest rate may persuade the stockholders to recalculate their return through dividend discount window and may react accordingly. The second type of OMO is repo (repurchase...