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| Sunday, 09 March 2003 |
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| News Business Features Editorial
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Central Bank begins Open Market Operations The Central Bank of Sri Lanka (CB) began the implementation of a monetary policy instrument, called Open Market Operations (OMO), last week, aimed at bringing about economic and price stability within the island. Under the OMO, depending on the requirements of the monetary policy, CB would either inject liquidity to the financial system by purchasing government securities, or absorb liquidity from the system by selling its holdings, government securities or its own securities, a CB news release stated. Under OMO, CB offers repurchase facilities when selling government securities with an agreement to buy them back at an agreed price on an agreed date to commercial banks and primary dealers. The aim would be to absorb liquidity on a short-term basis at an interest rate known as the Repurchase (Repo) Rate. Similarly, reverse repurchase facilities would entail buying government securities with an agreement to sell them back at an agreed price and date. The intention is to inject liquidity on a short-term basis. The interest rate at which this reverse repurchase facility is made available is known as the Reserve Repurchase (Reverse Repo) Rate. The main features of OMO are: an interest rate corridor; daily auction of either repo or reserve repo and maintenance of the inter-bank rate stability within the corridor; standing facilities; and outright buying or selling of treasury bills or bonds at the discretion of the CB to either inject or absorb long-term liquidity. An interest rate corridor specified in terms of the Repo Rate (lower bound - currently at nine per cent) and the Reserve Repo Rate at 11 per cent is expected to be announced by the CB shortly. The corridor will signal the monetary policy stance of CB to the market. It will be reviewed regularly, usually at monthly intervals, against macro-economic developments and prospects. At these reviews, the decision will be made on changing the corridor. The decision will be announced, together with an analysis of factors that would make the CB monetary policy more transparent, enabling the market to have a better understanding of the thinking of the authorities. |
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