Central Banks

What Is The Function Of Central Banks

Major global central banks meet periodically to set the monetary policy environment that will help them to realise their objectives. These objectives can be target inflation, the unemployment rate and overall GDP. A major threat to sustainable economic growth is price stability, and this generally tops the agenda of central bank meetings. In addition to targeting inflation, central banks can also directly interfere in the markets to influence the demand and supply of money.

To achieve their motives, central banks utilise various tools that include:

1. Interest Rates.
   Central banks can hike or cut interest rates when lending to other banks. Rate hikes make the underlying currency more expensive, which limits supply. Rate cuts increase supply, making the underlying currency cheaper.


2. Direct Involvement in the Market.
   Central banks can engage in the open market by directly buying or selling government bonds and treasuries or commercial debt. This can increase the supply of money in the economy or reduce it.


3. Minimum Reserve Requirements.
   Central banks institute minimum reserve amounts that other banks must hold at any given time. If the amount is raised, banks will have fewer resources to offer their services; but if the amount is reduced, the banks will have more resources to serve their customers.

Most Important Banks in the World

The most important central bank in the world is, without doubt, the US Federal Reserve. This is because of the country’s standing in the global economy as well as the power of the US dollar in international trade. Other influential central banks include the European Central Bank (which covers the bulk of Europe), Bank of England, Bank of Canada, Bank of Japan, People’s Bank of China, Swiss National Bank, South African Reserve Bank, Reserve Bank of New Zealand, and the Reserve Bank of Australia. It is important to track the periodic monetary policy meetings of these banks using the Economic Calendar tool to stay on top of major fundamental opportunities in the market.

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