What are open market operations, and how do they help central banks control inflation and interest rates?
Answer (1)
Open market operations (OMO) are actions taken by a central bank—like the Bangko Sentral ng Pilipinas (BSP)—to buy or sell government securities (like treasury bills or bonds) in the financial market. The goal is to control the money supply, interest rates, and ultimately inflation.Here’s how it works:When the BSP sells securities, it takes money out of the banking system. Banks have less money to lend, so interest rates go up. Higher rates make borrowing more expensive and discourage spending, which helps slow inflation.When the BSP buys securities, it puts more money into the banks. This increases the money available for lending, which makes interest rates go down. Lower rates encourage borrowing and stimulate economic activity.In short, selling securities helps reduce inflation, while buying securities helps boost the economy during slowdowns.Let’s apply this to the Philippines. In 2022, inflation rose due to high oil prices and food shortages. To respond, the BSP began using OMO to tighten the money supply—selling securities to make credit more expensive. This helped prevent too much money from circulating, which could worsen price increases.Imagine a Filipino business owner who wants to take a loan to expand a sari-sari store. If interest rates are high due to BSP’s OMO, they might delay borrowing, slowing spending and inflation. On the other hand, during a pandemic, the BSP might buy securities to make loans cheaper, helping businesses survive.OMO is a powerful, flexible tool. It can be used daily or weekly, depending on inflation trends and economic conditions. Unlike raising taxes or passing new laws, OMO can be adjusted quickly—making it one of the central bank’s best tools to maintain economic stability.
