Which of the following is used by the central bank to control the rate of interest

1. Analyze the question The question asks which tool a central bank (in Nigeria, the CBN) uses to control the rate of interest. So we need a monetary policy instrument, not a banking product.

2. Explain the concept Central banks manage money supply and interest rates using monetary policy tools, including:

• Open market operations (OMO): buying and selling government securities (e.g., Treasury bills, FGN bonds) in the market.
• Monetary Policy Rate (MPR): the benchmark rate the CBN sets.
• Cash Reserve Ratio (CRR): the share of deposits banks must keep with the CBN.
• Liquidity ratio and moral suasion.

How OMO affects interest rates:

• When the CBN sells securities, banks and the public pay money to the CBN. Money supply falls, funds become scarcer, and interest rates rise.
• When the CBN buys securities, it injects money into the economy. Money supply rises, funds become more plentiful, and interest rates fall.

3. Check each option

• A. Bill of exchange: a commercial credit instrument used between traders to settle debts. It is not a central bank policy tool.
• B. Banker's order (standing order): an instruction from a customer to their bank to make regular payments. It is a customer service, not a policy tool.
• C. Fixed deposit account: a savings product offered by commercial banks. It is not a central bank policy tool.
• D. Open market operation: a main monetary policy instrument that the central bank uses to influence money supply and interest rates. ✔

4. Answer The correct option is D. open market operation.

5. Exam tip Remember the central bank's tools with the phrase "OMO, MPR, CRR". If an option is something a customer or trader uses (bill of exchange, banker's order, fixed deposit), it is not a central bank control tool. Pick the one that sounds like policy.