Central banks carry out a nation’s monetary policy and control its money supply, often mandated with maintaining low inflation and steady GDP growth. On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.
How does the government control the supply of money to the economy?
Open Market Operations (OMO) refers to actions by the CBK involving purchases and sales of eligible Government securities to regulate the money supply and the credit conditions in the economy. OMO can also be used to stabilise short-term interest rates.
How does a central bank control the money supply?
A central bank is a public institution that manages the currency of a country or group of countries and controls the money supply – literally, the amount of money in circulation.
What happens when the central bank raises interest rates?
This will usually raise interest rates, because there is less money available while assuming demand is the same. The central bank can also buy foreign currency which will lower the money supply and increase interest rates. Additionally, it could print more money and increase the money supply as a result but this almost always results in inflation.
Why does the Central Bank use the discount rate?
It has been argued that, for open market transactions to become more efficient, the discount rate should keep the banks from perpetual borrowing, which would disrupt the market’s money supply and the central bank’s monetary policy. By borrowing too much, the commercial bank will be circulating more money in the system.
How does the Central Bank work to keep the economy healthy?
If a nation’s economy were a human body, then its heart would be the central bank. And just as the heart works to pump life-giving blood throughout the body, the central bank pumps money into the economy to keep it healthy and growing. Sometimes economies need less money, and sometimes they need more.
