The Role Of Central Banks In The Economy

The Role Of Central Banks In The Economy

What is Central Bank?

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 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 the central bank is Interest/bank rates adjustments. When the Central Bank sees a need to hike or cut their rates, they simply do so.

Why do Central Banks hike the Interest Rates?

When the economy is growing at a rate that may lead to hyperinflation (monetary inflation occurring at a very high rate)

Why do Central Banks cut the Interest Rates?

The Central bank 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.

Why do we (traders) care about whether the Central Banks hike or cut their rates?

The biggest factor that shifts the price in the Forex markets is the Interest Rate changes set by the Central Banks. The changes made by the Central Banks in their rates are the indirect response to other indicators/economic data released right throughout the month.

Which Central Banks do I follow?

There are 8 major Central Banks that I follow on a monthly basis. Last week on the 10th of May, BOE decided to leave their rates unchanged at 0.50%. You can also check ECB annual schedule HERE. For Federal Reserve annual schedule, check this post HERE. Also check BOC annual dates HERE.

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