Central bank: why is so important?

Central bank: what it is

In short: by central bank we mean a public institution, found in most countries, whose main task is to manage the fiat currency of the land through some practical tools it has at its disposal.

Central banks should not be confused with commercial banks. The latter are the institutions where we can open accounts, start investments and so on. Central banks do not offer these services: their job is to be the “banks’ banks”; this is because it is the central bank that lends money to the commercial banks, money that will then be invested or lent to the people and companies that should require it.

"Let's not confuse central banks with commercial banks-they are two distinct types!"

What are central banks for?

What is the role of central banks? As we said, the main role is as manager of the country’s currency, controlling its supply and intervening where necessary. The purpose of the maneuvers put in place is to ensure price stability, thus countering phenomena such as inflation.

In detail, what are the central bank’s tasks? It depends from case to case; some central banks will have more tasks than others, but we can argue that the items on the list are almost always present:

• Control of money (includes setting central bank interest rates);
• Managing foreign exchange reserves;
• Overseeing markets and their member institutions, within the limits of assigned powers;
• Keeping an eye on price trends and intervening if necessary;
• And so much more!

We have already mentioned central bank rates, certainly the most well-known task of these institutions. By setting interest rates and intervening in the money supply, a central bank can steer certain economic parameters in a desired direction.

When a central bank intervenes, it always starts a chain of related events that has benefits and consequences. Markets and investors assiduously follow what central banks communicate, aware of the impact of the decisions they make. But ordinary people should also take an interest in the actions of central banks, because it could have no small impact on prices, theeconomy andemployment in the country.

Who controls the central banks?

The control of a central bank does not have a globally defined figure, but depends from case to case.

However, we can say that every such institution has a president, that is, a key personality who, in varying ways, holds the reins.

In addition, there is generally a board of figures who make the decisions and of which the president obviously is a member. These people are selected on the basis of background in the industry, theoretically rewarding those who are most deserving and prepared. However, we must point out that it is often political motivations that prevail, even though in any case those who join the upper echelons of these institutions have a respectable track record.

Central banks are closely linked to the state of which they are a part. For example, the U.S. Fed makes decisions “autonomously,” but it certainly cannot act with total disregard for the government in office (hence the quotation mark).

Describing the entanglements that take place behind the scenes, however, leaves time to be found. We all know well that economics and politics are inextricably linked, and we can imagine how much they must try to move in concert.

Most important institutions

There are a great number of countries in the world that have their own central bank. However, some of these institutions are more important globally, depending on the economic power of the state in question, its currency and its role in the world economic scenario.

The U.S. central bank, namely the Federal Reserve, is undoubtedly the most important player of all. This is because the U.S. economy is the largest and the dollar is a desired and traded currency on a global scale. Decisions made by the FED also have a major impact on financial markets, affecting all world stock markets with a domino effect. The most important committee, responsible for setting U.S. dollar interest rates, is the FOMC.

Also very important is the European Central Bank, that is, the central authority of the Eurozone. As with its overseas colleague, it is able to move continental economic trends in no small measure, with direct consequences even beyond the borders over which it holds jurisdiction.

Mention should also be made of the Bank of England, an ancient British institution that economists and investors always keep an eye on when it is in the process of making decisions. The pound remains a major global currency, and the BoE has enormous responsibilities to follow.

Then there are the Bank of Japan (i.e., the Japanese central bank), the Bank of Canada, and the Reserve Bank of Australia. Also worth mentioning are the Central Bank of the Russian Federation, the People’s Bank of China and the Banco Central do Brasil.

Conclusions

This in-depth study has also come to a conclusion. Keep following us for new articles from the world of business and finance.

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