Repo Agreement

A repo agreement is one way of borrowing/lending without the issue of a new security, as one side sells an existing financial instrument to the other with an agreement to repurchase it a later date, with a pre-agreed price.

Repos are short term instruments and other lending and interest rates are linked to the repo rates. As such, if the central bank is concerned about the rate of growth of credit, it will attempt to increase interest rates by using the repo market. This can be achieved by selling instruments today (in this way already reducing the money available in the market for credit) and agreeing to buy back on “generous” terms, i.e. a repurchase price that results in a high interest rate, thus leading to an increase in the market interest rates.

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