Abstract
The Central Bank of Sri Lanka introduced a system of active Open Market Operations (OMO) on 03 March 2003 in order to manage liquidity at its own discretion and thereby to achieve monetary policy targets. Under this system, monetary policy operations are conducted to achieve a path of reserve money targets, while maintaining short term interest rates stable around a level, which is consistent with the reserve money targets. This paper reviews the experience under the system during March 2003- June 2005 and presents suggestions, on the basis of the review, for improving the effectiveness of monetary policy operations in achieving their objectives. The paper highlights the need for focusing on overnight interest rates, instead of reserve money, as the operating target, determining the size of daily operations under OMO entirely on the basis of their outcome on interest rates and introducing long term repurchase transactions and auctions for multiple maturities for managing liquidity on a long term basis. (JEL E44, E52) DOI: 10.4038/ss.v36i1.1229 Staff Studies Volume 36 Numbers 1& 2 2006 p.15-35
Highlights
The Central Bank of Sri Lanka introduced on 3 March 2003, a system of active Open Market Operations (OMO) in order to manage market liquidity actively at its own discretion and thereby to achieve monetary policy targets
The key elements of the present system of monetary policy operations are, (i) Interest Rate Corridor formed by the overnight repurchase (Repo) rate and the reverse repurchase (Reverse Repo) rate of the Central Bank
The corridor has an implicit target on overnight interest rates which is considered compatible with the reserve money target
Summary
The Central Bank of Sri Lanka introduced on 3 March 2003, a system of active Open Market Operations (OMO) in order to manage market liquidity actively at its own discretion and thereby to achieve monetary policy targets. The Central Bank conducts monetary policy within a framework of targeting monetary aggregates In this framework, the final objective of economic and price stability is expected to be achieved through an intermediate target on broadly defined money supply with an operational target on reserve money. Central Bank of Sri Lanka in the preparation of this paper is acknowledged with thanks. This paper reviews the experience under this system with a view to present suggestions for improving the effectiveness of the system in achieving the objectives of monetary policy operations.
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