Open Market Operations (OMO) are the primary tool used by central banks to control money supply and interest rates in the economy. They work by buying or selling government securities like treasury bills and bonds in the open market.
When the central bank wants to increase money supply, it buys government securities from commercial banks. This increases bank reserves, gives them more money to lend, lowers interest rates, and encourages investment and economic activity.
Conversely, when the central bank wants to reduce money supply, it sells government securities to commercial banks. This decreases bank reserves, leaves them with less money to lend, raises interest rates, and discourages investment to bring inflation under control.
Bangladesh Bank uses several OMO tools including Repo (where banks borrow from the central bank by pledging government securities), Reverse Repo (where the central bank absorbs excess liquidity by selling securities to banks), and Bangladesh Bank Bills. These tools help Bangladesh Bank manage liquidity and maintain economic stability.