Discount Rate
This
is the rate at which the Central Bank and other depository institutions lend
money to the commercial banks. It represents the cost of borrowing by the
commercial banks from the Central Bank. This rate is usually set below short
term market rates. (T-bills). This enables the institutions to vary credit
conditions (the amount of money they have to loan out) thereby affecting the
money supply. It is of note that the discount rate is the only instrument which
the central banks do not have total control over.
Open Market Operations (OMO)
Monetary
policy can be implemented by changing monetary base. Central Banks use (OMO) to
change the monetary base. They buy or sell reserve assets (usually financial
instruments such as bonds) in exchange for money on deposit at the central
bank. Those deposit are convertible to currency. Together such currency and
deposits constitutes the monetary base which is the general liabilities of the
central bank and its own monetary unit.
Reserve Ratio
The
commercial banks have a statutory obligation to have a defined ratio of their
total deposit liabilities with the central bank; Obinna (2008). If
contractionary monetary policy is desired the Central Bank raises the ratio of
the reserve thereby forcing the commercial banks to cut back on their lending
activities and therefore their ability to create money.
Moral Suasion
This
consists of informal advice and appeal by the central bank to the commercial
banks about how they conduct their credit policy and lending operations. The
essence of this technique is persuading rather than forcing the commercial bank
to heed to the advice given by the central bank.
Direct Control of Banking System
This
involves the imposition of quantitative ceiling on the overall or sectoral
distribution of credit by central bank. This tool is selective not general, it
is direct. It can be used as a weapon for economic growth.
Direct Regulation of interest Rate
The
contraction of the monetary supply can be achieved indirectly by increasing the
normal interest rate. Monetary authorities in different nations have different
levels of control of economy. However in Nigeria interest rate are
administered. It is fixed with both the deposit and the lending rates and are
expected to be maintained by the commercial banks.
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