An
open market operation (
OMO) is an activity by a
central bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks. The central bank can either buy or sell
government bonds in the open market (this is where the name was historically derived from) or, which is now mostly the preferred solution, enter into a repo or secured lending transaction with a commercial bank: the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral. A central bank uses OMO as the primary means of implementing
monetary policy. The usual aim of open market operations is - asides from supplying commercial banks with liquidity and sometimes taking surplus liquidity from commercial banks - to manipulate the short-term
interest rate and the supply of
base money in an economy, and thus indirectly control the total
money supply, in effect
expanding money or contracting the money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government
securities, or other
financial instruments. Monetary targets, such as
inflation,
interest rates, or
exchange rates, are used to guide this implementation.