CENTRAL BANK OF THE COUNTRY

Weapons of the Central Bank:

There are 3 weapons of Central Bank which it uses while carrying out the government monetary policies.

1) Interest Rates:

Central Bank has very powerful effect on interest rates because it influences other market rates by defining its MLR (minimum lending rate). If interest rates are raised than borrowing is discouraged and credit creation process is slowed down. If interest rates are reduced than borrowing becomes more worthwhile and stimulates the creation of new deposits.

2) Special Deposits:

It is the call from Central Bank to other Banks to pay over a proportion of their eligible liabilities in cash. It reduces the ability of the banks to lend to public to check money supply.

3) Open Market Operations:

When the Government sells securities and bank deposits are reduced so too are the cash holding of the banks. They reduces their lending which will reduce bank deposits. Open Market Operations can be very effective in reducing the availability of credit to the community they are also used to support the Bank’s measures to influence interest rates. By controlling the stock securities available in the market it can influence their prices and interest rates.