Open Market Operations
IntermediateOpen market operations are the buying and selling of government securities or other assets by a central bank in financial markets, to manage the money supply and keep short-term interest rates close to its policy rate.
Open market operations are one of the main tools central banks use to implement monetary policy day to day.
When a central bank buys securities, such as government bonds, from banks, it pays for them by adding money to the banks' reserve accounts. This increases the amount of money in the banking system, which tends to push short-term interest rates down. When it sells securities, it takes money out of the system, which tends to push rates up.
For example, if short-term market rates are drifting above the central bank's target, it can buy securities to add money to the system and bring rates back down.
Many open market operations are temporary, carried out through repurchase agreements, where the central bank buys securities and agrees to sell them back shortly afterwards. Large-scale, long-term purchases of assets, designed to lower longer-term interest rates when the policy rate is already very low, are known as quantitative easing.
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