Setting Short Term Interest Rates in the Money Market

The previous chapter discussed the factors which are taken into account by the monetary authorities when deciding on the appropriate level of short term interest rates. This chapter discusses the mechanics of the money market and explains how the authorities act to set interest rates. The distinction between interest rates set by administrative decision and those set in line with money market interest rates is made. A brief discussion of the change in the authorities’ attitude to the relative merits of ‘administered’ and ‘market related’ interest rates is followed by a detailed discussion of present practices. The reasons for Bank intervention in the money market and its operational techniques are examined. The relationship between official money market actions and the determination of the clearing banks’ interest rates is discussed in the final section.