Open market operations (OMO) are the purchase and sale of government securities and other eligible assets by a central bank in the open market to steer short-term interest rates and the supply of reserves in the banking system. By adding or draining reserves, OMO move the policy rate toward its target and transmit monetary policy to the wider economy. They are the principal day-to-day tool of monetary-policy implementation in most advanced economies.
Overview
- Through OMO a central bank transacts with primary dealers and banks, buying securities to inject reserves (easing) or selling them to withdraw reserves (tightening). The resulting change in the quantity of reserves moves the overnight interbank rate toward the policy target; repurchase agreements provide a reversible, short-tenor mechanism for fine-tuning liquidity day to day. OMO sit alongside standing facilities and reserve requirements within the operational framework of monetary policy.
Mechanisms
- Outright purchases and sales of eligible securities
- Repurchase and reverse-repurchase agreements for short-term liquidity
- Steering the overnight policy rate toward target
- Managing the aggregate supply of bank reserves
- Coordination with standing facilities and reserve requirements
Applications
- Daily steering of short-term interest rates
- Liquidity management within the banking system
- Quantitative easing and tightening of the central-bank balance sheet
- Transmission of policy decisions to credit and bond markets