Why Do Central Banks Make Public Announcements of Open Market Operations?
Central banks routinely conduct open market operations to maintain the key interest rate at a level deemed necessary to achieve their mandate, e.g., the inflation target. Specifically, funds are:
- supplied through open market operations when the prevailing interest rate is greater than the desired level, and
- withdrawn when this rate is less than the desired level.
Several researchers have established that adjusting the supply of liquidity is important for achieving the targeted interest rate. But they have not explained why it is common for central banks to communicate information about open market operations to the general public. We examine why central banks make such public announcements.
We show that central bank communications about open market operations allow participants in financial markets to learn about the prevailing conditions in the market for overnight loans. This improved transparency ensures that the benchmark interest rate is more accurately priced and provides more information about the underlying demand and supply of funding liquidity.