Question

Distinguish between the following:
Bank Rate and Open Market Operation

Answer 1

1. Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral whereas Open market operation (OMO) refers to the operations of the central bank in which the bank deals in the sale and purchase of securities in the open market.
2. During inflation, bank rate is increased to reduce the money supply in the economy whereas in open market the central bank sells all its securities in the market in order to soak the liquidity in the economy.
   
3. During deflation, bank rate is decreased to increase the money supply in the economy whereas in open market the central bank buy all the securities in the market in order to release the liquidity in the economy.