What is A Central Bank?
A Central bank is a national bank that provides financial and banking services for its country’s government and commercial banking system.
What is the role and function of A Central Bank?
- To set official bank rates used to manage inflation and exchange rates
- To issue a country’s currency
- To set targets and monitor economic data while they implement special tools.
One of the special tools that is used by a Central Bank is Interest/bank rates adjustments. When a Central Bank sees a need to hike or cut their rates, they simply do so.
Why do Central Banks hike their Interest Rates?
When the economy is growing at a rate that may lead to hyperinflation (monetary inflation occurring at a very high rate) that is when the Central Bank hikes the county’s Interest Rate.
Why do Central Banks cut the Interest Rates?
Central banks may cut the Interest Rates to encourage people to borrow more money at a lower rate, be it for new houses or businesses. The aim is to also make saving money less attractive as the returns are lower when the rates are cut.
About Reserve Bank OF Australia (RBA)
Reserve Bank Of Australia’s Interest Rates are released every first Tuesday of the month, excluding January. On the 6th of April, they’ll hold their 3rd meeting of 2021 to decide on their Interest Rates.
Why Do We (traders) Care About Interest Rates?
Interest Rates are a primary tool that a Central Bank uses to valuate their currency. If their plan is to hike, it strengthens the currency and if their plan is to cut, it weakens the currency.
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