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=Repurchase (repo) / reverse repurchase (reverse repo) agreements.

The BSP purchases government


securities from a bank with a commitment to sell it back at a specified future date at a predetermined rate.
In effect, a repo transaction expands the level of money supply as it increases the banks level of reserves.
Under a reverse repo, the BSP acts as the seller of government securities, thus, the banks payment
reduces its reserve account resulting in a contraction in the systems money supply. For both repos, the
BSP can only affect the level of money supply temporarily, given that the parties involved commit to reverse
the transaction at an agreed future date. At present, the BSP enters into repo agreements for a minimum
of one (1) day (overnight) for both repos and a maximum of 91 days and 364 days for repo and reverse
repo agreements, respectively.

Outright purchases and sales of securities. An outright contract involves direct purchase/sale of
government security by the BSP from/to the market for the purpose of increasing/decreasing money supply
on a more permanent basis. In such a transaction, the parties do not commit to reverse the transaction in
the future, creating a more permanent effect on the banking systems level of money supply.

The BSP may also use other monetary policy tools such as reserve requirements and rediscounting to expand or
contract money supply. The BSP may also grant loans and advances to banking institutions to influence the volume
of credit consistent with the objective of price stability. In addition, the BSP can employ moral suasion as a last
resort when existing market mechanisms cannot adequately and promptly ensure the attainment of specific
monetary objectives.

Advantages of Open Market Operations

However, among the tools available to the BSP, OMO offers advantages and continues to be the most practical
tool for the following reasons:

First, it works within the BSPs initiative and control. Having the authority to steer market interest rates, the
BSP can influence money supply by changing the monetary policy rates. Consequently, OMO gives the
BSP greater flexibility in terms of the amount and timing of intervention.

Secondly, it is fast to implement and gives quick results. Any change in the policy rates is readily
implemented, i.e., on the same day that the Monetary Board makes the resolution. Thus, any effect on the
market is evident right after the overnight trading for the day.

Moral Suasion the influence which the central bank exercises to induce or convince banks to conduct operations
in a manner that would contribute to the attainment of monetary goals but not necessarily support the profit-
maximizing objectives of the banks.