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Open Sesame

The Central Bank will start open market operations for the money market on Monday. The market friendly move will give the Central Bank a new monetary policy instrument to influence short-term rates.

Central Bank says market participants will play a greater role in determining over night interest rates under its plan to introduce open market operations.rn

rnThe market oriented monetary policy move will see the Central Bank deciding on how much liquidity the bank should inject or absorb.rn

rnBut the market will decide the interest rate at which the transaction takes place.rn

rnThe bank says the move aims to improve the resource allocation in the local market.rn

rnldblquote Any monetary policy instrument that does not distort the resource allocation function of the market is called as market oriented monetary policy, dblquote explains Deputy Governor of the Central Bank W A Wijewardene.rn

rnldblquote There we allow the market forces to determine the interest-rates, the level of liquidity and at what price the liquidity is obtained and it is being done by the open market operation of the Central Bank. dblquotern

rnCentral Bank says the move is in line with international best practice to move towards more market oriented interest rates.rn

rnldblquote International trend today even for the monetary management is to rely more on the open market policy instruments. The open market operation is the most effective and the most common market oriented instrument available.

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We are also moving gradually towards that, dblquote says Dr A G Karunasena the Economic Research Director of the Central Bank.rn

rnCentral Bank plans to announce a corridor within which the market will can determine the rate.rn

rnHowever, the market operations committee at the bank each morning will determine the liquidity absorption or injection.rn

rnldblquote We meet and look at the liquidity assessment and make a decision as to whether inject or absorb liquidity. And how much liquidity to absorb or inject, dblquote Explains Dr D. S. Wijesinghe the Director Domestic Operations Department.

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rnThe Central Bank says it will review the interest rate corridor on a monthly basis. rn

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