The term "open market operations" means the aggregate actions of the central bank to change the liquidity of the financial system. In practice, there is an increase or decrease in the supply of national currency in circulation. To this end, government bonds are sold or bought by the country's central bank on the open market (hence the name) or participate in repurchase transactions, which is the most used instrument of modern monetary policy with commercial credit and financial institutions. Its main goal is always to ensure the proper level of liquidity, to establish the necessary interest rate, national currency rate, inflation in the short term and to maintain the strategic volume of the monetary base.
Essence of the process
The term "open market operations" means that the Central Bank directly affects liquidity. It has special accounts of loro commercial establishments. Their balance sheet reflects the Central Bank's money in the respective currency. An increase in the amount in the accounts does not lead to a mandatory additional issue of banknotes. This is due to the fact that modern money exists more in the form of electronic records, and not as physical objects. Therefore, the Central Bank can instantly increase or decrease the amount in Loro accounts. However, electronic money is exchanged for coins and banknotes. Therefore, after increasing the amount in the loro account, the Central Bank should be ready for additional emission. However, only if cash is required by a commercial financial institution.
REPO transactions
The term “open market operations” means in developed countries that the Central Bank not only gives a loan, but also takes as collateral assets that are considered to be suitable. The cost of the latter should cover the amount provided to the commercial financial and credit institution on credit. The use of repurchase transactions avoids unnecessary fluctuations in interest rates, exchange rates and inflation associated with a sharp change in monetary policy. Collateral is also a guarantee that the national economy will not incur a loss in case of bankruptcy of the borrower.
Interest rate relationship
The term “open market operations” means an instrument of monetary policy, which involves the purchase or sale of bonds by the Central Bank of the country. The main purpose of such actions is related to the regulation of the size of the monetary base and short-term lending rates. Also, during such operations, the level of inflation and the exchange rate change. Everything is the same as with the goods. If the Central Bank begins to sell government bonds, then the liquidity of the financial system is reduced. In circulation, there is less cash. This leads to an increase in overall demand for money. Accordingly, interest rates are rising, the national currency is strengthening, inflation is declining. If you need to reduce interest rates, the Central Bank sells government bonds. This increases the supply of money. In fact, a sufficiently large financial and credit institution can always affect the level of rates. But the Central Bank has endless resources to replay the situation.
IN THE USA
After the global financial crisis, the Fed began to pay interest on excess bank reserves. This reduces the risk of commercial banks issuing loans to unreliable borrowers. The actions of the Central Bank in the foreign exchange market are mainly represented by overnight repos. They are used to temporarily increase the supply of money. The Fed also performs reverse repos. They are used when you need to reduce the supply of money supply. REPO transactions are used to temporarily compensate for changes in bank reserves. The Fed also conducts transactions for the final sale or purchase of government bonds or other financial assets.
THE WEIGHT
The European Union uses similar monetary regulation tools. The ECB describes its monetary policy as four-tier. Which operations are used depends on the desired outcome and the need for changes in the financial sector in the short or long term.
In the Russian Federation
The Central Bank of Russia also uses the transactions in question as part of its policy. However, their scale is much smaller than in the United States. The purpose of the Central Bank of Russia is to ensure the stability of the ruble exchange rate, uninterrupted operation and strengthening the financial sector. REPO operations for the Russian Federation are a fairly new regulatory tool, but they are already widely used and have good prospects for further development.