Central bank

The task of managing its currency is usually delegated by a country's government to its central bank and with it, the responsibility for maintaining monetary stability. One way of doing so is by varying the interest rate that it charges the banks. A rate reduction encourages banks to borrow money so that they can increase lending and so create more money. Another way of increasing the money supply is by an open market operation in which the central bank offers to buy government securities from the banks, paying for them by a nominal increase in the reserves that the banks deposit with it (sometimes referred to as "printing money"). The resulting increase in the banks' reserves also enables them to increase their lending and so create more money. Alternatively, the money supply can be increased more directly by reducing the minimum reserve ratios that the banks are legally required to maintain. It is also open to a central bank to "sterilise" the monetary system against other influences upon the money supply by increasing or reducing its holdings of government securities. However, the degree of control that can be achieved by any of those methods is limited by the fluctuations that occur in the demand for money.