Central Bank

Definition:
A nation's principal monetary authority, such as the Federal Reserve Bank, which
regulates the money supply and credit, issues currency, and manages the rate of
exchange.
Investment dictionary
Central bank
The entity responsile for overseeing the monetary system for a nation !or group of
nations". #entral anks have a wide range of responsiilities $ from overseeing monetary
policy to implementing specific goals such as currency staility, low inflation and full
employment. #entral anks also generally issue currency, function as the ank of the
government, regulate the credit system, oversee commercial anks, manage exchange
reserves and act as a lender of last resort.
The central anking system in the %.&. is known as the Federal Reserve &ystem
!commonly known as 'the Fed'", which is composed of twelve regional Federal Reserve
Banks located in ma(or cities throughout the country. The main tasks of the Federal
Reserve are to supervise and regulate anks, implement monetary policy y uying and
selling %.&. Treasury onds !T$ills", and steering interest rates. Ben Bernanke currently
serves as the chairman of the Board of )overnors of the Federal Reserve.
Related*inks+
This ,-.. agreement sought to decrease the potential for ankruptcy among ma(or
international anks. /oes The Basel Accord &trengthen Banks0
The policies of these anks affect the currency market like nothing else $ see what makes
them tick. )et To 1now The 2a(or #entral Banks
They print money, they control inflation, and much, much more. All you need to know
aout central anks is here. 3hat Are #entral Banks0
Few organi4ations can move the market like the Federal Reserve. As an investor, it's
important to understand exactly what the Fed does and how it influences the economy.
The Federal Reserve
*earn how the largest and fastest growing market can work for you. The Forex 2arket
*earn aout the tools the Fed uses to influence interest rates and general economic
conditions. Formulating 2onetary 5olicy
Central Bank Functions
)overnment agency that performs a numer of key functions+
!," issues the nation's currency6
!7" regulates the supply of credit in the economy6
!8" manages the external value of its currency in the foreign exchange markets6
!9" holds deposits representing reserves of other anks and other central anks6
!:" acts as Fiscal Agent for the central government, when the government sells new
issues of securities to finance its operations6 and
!;" attempts to maintain an orderly market in these securities y actively participating in
the government securities market.
The Federal Reserve &ystem, the central ank in the %nited &tates, regulates Bank #redit
y raising or lowering the /iscount Rate and y uying and selling government securities
in the open market. This process, known as <pen 2arket <perations, aims to promote
stale economic growth while controlling the rate of inflation. <ther ma(or central anks
are the Bank of =ngland, the =uropean #entral Bank, and the Bank of >apan. &ee also
Bank for ?nternational &ettlements6 Basel #ommittee6 ?ntervention6 *ender of *ast
Resort6 2onetary 5olicy6 &wap @etwork.
History
?n =urope prior to the ,Ath century most money was commodity money, typically gold or
silver. Bowever, promises to pay were widely circulated and accepted as value at least
five hundred years earlier in oth =urope and Asia. The medieval =uropean 1nights
Templar ran proaly the est known early prototype of a central anking system, as
their promises to pay were widely regarded, and many regard their activities as having
laid the asis for the modern anking system.
As the first pulic ank to 'offer accounts not directly convertile to coin', the Bank of
Amsterdam estalished in ,;C- is considered to e a precursor to a central ank.D8E. ?n
,;;9, the central ank of &wedenF'&veriges Riksank' or simply 'Riksanken'Fwas
founded in &tockholm and is y that the world's oldest central ank !still operating today"
D9E. This was followed in ,;-9 y the Bank of =ngland, created y &cottish usinessman
3illiam 5aterson in the #ity of *ondon at the reGuest of the =nglish government to help
pay for a war.
Although central anks today are generally associated with fiat money, the nineteenth
and early twentieth centuries central anks in most of =urope and >apan developed under
the international gold standard, elsewhere free anking or currency oards were more
usual at this time. 5rolems with collapses of anks during downturns, however, was
leading to wider support for central anks in those nations which did not as yet possess
them, most notaly in Australia.
3ith the collapse of the gold standard after 3orld 3ar ?, central anks ecame much
more widespread. The %& Federal Reserve was created y the %.&. #ongress through the
passing of the )lass$<wen Bill, signed y 5resident 3oodrow 3ilson on /ecemer 78,
,-,8, whilst Australia estalished its first central ank in ,-7C, #olomia in ,-78,
2exico and #hile in ,-7: and #anada and @ew Healand in the aftermath of the )reat
/epression in ,-89. By ,-8:, the only significant independent nation that did not possess
a central ank was Bra4il, which developed a precursor thereto in ,-9: and created its
present central ank twenty years later. 3hen African and Asian countries gained
independence, all of them rapidly estalished central anks or monetary unions.
The 5eople's Bank of #hina evolved its role as a central ank starting in aout ,-A- with
the introduction of market reforms in that country, and this accelerated in ,-.- when the
country took a generally capitalist approach to developing at least its export economy. By
7CCC the 5eople's Bank of #hina was in all senses a modern central ank, and emerged as
such partly in response to the =uropean #entral Bank. This is the most modern ank
model and was introduced with the euro to coordinate the =uropean national anks,
which continue to separately manage their respective economies other than currency
exchange and ase interest rates.
Activities and responsiilities
Functions of a central ank !not all functions are carried out y all anks"+
implementing monetary policy
determining ?nterest rates
controlling the nation's entire money supply
the )overnment's anker and the ankers' ank !'lender of last resort'"
managing the country's foreign exchange and gold reserves and the )overnment's stock
register
regulating and supervising the anking industry
Monetary policy
#entral anks implement a country's chosen monetary policy. At the most asic level,
this involves estalishing what form of currency the country may have, whether a fiat
currency, gold$acked currency !disallowed for countries with memership of the ?2F",
currency oard or a currency union. 3hen a country has its own national currency, this
involves the issue of some form of standardi4ed currency, which is essentially a form of
promissory note+ a promise to exchange the note for 'money' under certain
circumstances. Bistorically, this was often a promise to exchange the money for precious
metals in some fixed amount. @ow, when many currencies are fiat money, the 'promise
to pay' consists of nothing more than a promise to pay the same sum in the same
currency.
?n many countries, the central ank may use another country's currency either directly !in
a currency union", or indirectly, y using a currency oard. ?n the latter case, local
currency is directly acked y the central ank's holdings of a foreign currency in a fixed$
ratio6 this mechanism is used, notaly, in Bulgaria, Bong 1ong and =stonia.
?n countries with fiat money, monetary policy may e used as a shorthand form for the
interest rate targets and other active measures undertaken y the monetary authority.
)oals of monetary policy
Price Stability
%nanticipated inflation leads to lender losses. @ominal contracts attempt to account for
inflation. =ffort successful if monetary policy ale to maintain steady rate of inflation.
Hig !mployment
The movement of workers etween (os is referred to as frictional unemployment. All
unemployment eyond frictional unemployment is classified as unintended
unemployment. Reduction in this area is the target of macroeconomic policy.
!conomic "ro#t
=conomic growth is enhanced y investment in technological advances in production.
=ncouragement of savings supplies funds that can e drawn upon for investment.
?nterest Rate &taility
Iolatile interest and exchange rates generate costs to lenders and orrowers. %nexpected
changes that cause damage, making policy formulation difficult.
Financial Market Stability
Foreign !$cange Market Stability
Conflicts %mong "oals
)oals freGuently cannot e separated from each other and often conflict. #osts must
therefore e carefully weighed efore policy implementation. To make conflict
productive, to turn it into an opportunity for change and progress, Follett advises against
domination, manipulation, or compromise. '>ust so far as people think that the asis of
working together is compromise or concession, (ust so far they do not understand the first
principles of working together. &uch people think that when they have reached an
appreciation of the necessity of compromise they have reached a high plane of social
development . . . But compromise is still on the same plane as fighting. 3ar will continue
$ etween capital and laour, etween nation and nation $ until we reliGuich the ideas of
compromise and concession.'
Currency issuance
2any central anks are 'anks' in the sense that they hold assets !foreign exchange,
gold, and other financial assets" and liailities. A central ank's primary liailities are the
currency outstanding, and these liailities are acked y the assets the ank owns.
#entral anks generally earn money y issuing currency notes and 'selling' them to the
pulic for interest$earing assets, such as government onds. &ince currency usually pays
no interest, the difference in interest generates income, called seigniorage. ?n most central
anking systems, this income is remitted to the government. The =uropean #entral Bank
remits its interest income to its owners, the central anks of the memer countries of the
=uropean %nion.
Although central anks generally hold government det, in some countries the
outstanding amount of government det is smaller than the amount the central ank may
wish to hold. ?n many countries, central anks may hold significant amounts of foreign
currency assets, rather than assets in their own national currency, particularly when the
national currency is fixed to other currencies.
@aming of central anks
There is no standard terminology for the name of a central ank, ut many countries use
the 'Bank of #ountry' form !e.g., Bank of =ngland, Bank of #anada, Bank of Russia".
&ome are styled 'national' anks, such as the @ational Bank of %kraine6 ut the term
'national ank' is more often used y privately$owned commercial anks, especially in
the %nited &tates. ?n other cases, central anks may incorporate the word '#entral' !e.g.
=uropean #entral Bank, #entral Bank of ?reland". The word 'Reserve' is also often
included, such as the Reserve Bank of ?ndia, Reserve Bank of Australia, Reserve Bank of
@ew Healand, the &outh African Reserve Bank, and %.&. Federal Reserve &ystem. 2any
countries have state$owned anks or other Guasi$government entities that have entirely
separate functions, such as financing imports and exports.
?n some countries, particularly in some #ommunist countries, the term national ank may
e used to indicate oth the monetary authority and the leading anking entity, such as
the %&&R's )osank !state ank". ?n other countries, the term national ank may e used
to indicate that the central ank's goals are roader than monetary staility, such as full
employment, industrial development, or other goals.
Interest rate interventions
Typically a central ank controls certain types of short$term interest rates. These
influence the stock$ and ond markets as well as mortgage and other interest rates. The
=uropean #entral Bank for example announces its interest rate at the meeting of its
)overning #ouncil6 in the case of the Federal Reserve, the Board of )overnors.
Both the Federal Reserve and the =#B are composed of one or more central odies that
are responsile for the main decisions aout interest rates and the si4e and type of open
market operations, and several ranches to execute its policies. ?n the case of the Fed,
they are the local Federal Reserve Banks6 for the =#B they are the national central anks.
*imits of enforcement power
#ontrary to popular perception, central anks are not all$powerful and have limited
powers to put their policies into effect. 2ost importantly, although the perception y the
pulic may e that the 'central ank' controls some or all interest rates and currency
rates, economic theory !and sustantial empirical evidence" shows that it is impossile to
do oth at once in an open economy. Roert 2undell's 'impossile trinity' is the most
famous formulation of these limited powers, and postulates that it is impossile to target
monetary policy !roadly, interest rates", the exchange rate !through a fixed rate" and
maintain free capital movement. &ince most 3estern economies are now considered
'open' with free capital movement, this essentially means that central anks may target
interest rates or exchange rates with crediility, ut not oth at once.
=ven when targeting interest rates, most central anks have limited aility to influence
the rates actually paid y private individuals and companies. ?n the most famous case of
policy failure, )eorge &oros aritraged the pound sterling's relationship to the =#% and
!after making J7 illion himself and forcing the %1 to spend over J.n defending the
pound" forced it to aandon its policy. &ince then he has een a harsh critic of clumsy
ank policies and argued that no one should e ale to do what he did.
The most complex relationships are those etween the yuan and the %& dollar, and
etween the euro and its neighours. The situation in #ua is so exceptional as to reGuire
the #uan peso to e dealt with simply as an exception, since the %nited &tates forids
direct trade with #ua. %& dollars were uiGuitous in #ua's economy after its
legali4ation in ,--,, ut were officially removed from circulation in 7CC9 and replaced
y the convertile peso.
Policy instruments
The main monetary policy instruments availale to central anks are open market
operation, ank reserve reGuirement, interest rate policy, re$lending and re$discount
!including using the term repurchase market", and credit policy !often coordinated with
trade policy". 3hile capital adeGuacy is important, it is defined and regulated y the Bank
for ?nternational &ettlements, and central anks in practice generally do not apply stricter
rules.
To enale open market operations, a central ank must hold foreign exchange reserves
!usually in the form of government onds" and official gold reserves. ?t will often have
some influence over any official or mandated exchange rates+ &ome exchange rates are
managed, some are market ased !free float" and many are somewhere in etween
!'managed float' or 'dirty float'".
Interest rates
By far the most visile and ovious power of many modern central anks is to influence
market interest rates6 contrary to popular elief, they rarely 'set' rates to a fixed numer.
Although the mechanism differs from country to country, most use a similar mechanism
ased on a central ank's aility to create as much fiat money as reGuired.
The mechanism to move the market towards a 'target rate' !whichever specific rate is
used" is generally to lend money or orrow money in theoretically unlimited Guantities,
until the targeted market rate is sufficiently close to the target. #entral anks may do so
y lending money to and orrowing money from !taking deposits from" a limited numer
of Gualified anks, or y purchasing and selling onds. As an example of how this
functions, the Bank of #anada sets a target overnight rate, and a and of plus or minus
C.7:K. Lualified anks orrow from each other within this and, ut never aove or
elow, ecause the central ank will always lend to them at the top of the and, and take
deposits at the ottom of the and6 in principle, the capacity to orrow and lend at the
extremes of the and are unlimited.D:E <ther central anks use similar mechanisms.
?t is also notale that the target rates are generally short$term rates. The actual rate that
orrowers and lenders receive on the market will depend on !perceived" credit risk,
maturity and other factors. For example, a central ank might set a target rate for
overnight lending of 9.:K, ut rates for !eGuivalent risk" five$year onds might e :K,
9.A:K, or, in cases of inverted yield curves, even elow the short$term rate. 2any central
anks have one primary 'headline' rate that is Guoted as the 'central ank rate.' ?n
practice, they will have other tools and rates that are used, ut only one that is rigorously
targeted and enforced.
'The rate at which the central ank lends money can indeed e chosen at will y the
central ank6 this is the rate that makes the financial headlines.' $ Benry #.1. *iu. D;E *iu
explains further that 'the %.&. central$ank lending rate is known as the Fed funds rate.
The Fed sets a target for the Fed funds rate, which its <pen 2arket #ommittee tries to
match y lending or orrowing in the money market ... a fiat money system set y
command of the central ank. The Fed is the head of the central$ank ecause the %.&.
dollar is the key reserve currency for international trade. The gloal money market is a
%&A dollar market. All other currencies markets revolve around the %.&. dollar market.'
Accordingly the %.&. situation is not typical of central anks in general.
A typical central ank has several interest rates or monetary policy tools it can set to
influence markets.
2arginal lending rate !currently ,.A:K in the =uro4one" M a fixed rate for institutions to
orrow money from the central ank. !?n the %&A this is called the discount rate".
2ain refinancing rate !,.CCK in the =uro4one" M the pulicly visile interest rate the
central ank announces. ?t is also known as minimum id rate and serves as a idding
floor for refinancing loans. !?n the %&A this is called the federal funds rate".
/eposit rate !C.7:K in the =uro4one" M the rate parties receive for deposits at the central
ank.
These rates directly affect the rates in the money market, the market for short term loans.
<pen market operations
Through open market operations, a central ank influences the money supply in an
economy directly. =ach time it uys securities, exchanging money for the security, it
raises the money supply. #onversely, selling of securities lowers the money supply.
Buying of securities thus amounts to printing new money while lowering supply of the
specific security.
&e main open market operations are:
Temporary lending of money for collateral securities !'Reverse <perations' or
'repurchase operations', otherwise known as the 'repo' market". These operations are
carried out on a regular asis, where fixed maturity loans !of , week and , month for the
=#B" are auctioned off.
Buying or selling securities !'direct operations'" on ad$hoc asis.
Foreign e$cange operations suc as fore$ s#aps '
All of these interventions can also influence the foreign exchange market and thus the
exchange rate. For example the 5eople's Bank of #hina and the Bank of >apan have on
occasion ought several hundred illions of %.&. Treasuries, presumaly in order to stop
the decline of the %.&. dollar versus the renmini and the yen.
#apital reGuirements
All anks are reGuired to hold a certain percentage of their assets as capital, a rate which
may e estalished y the central ank or the anking supervisor. For international anks,
including the :: memer central anks of the Bank for ?nternational &ettlements, the
threshold is .K !see the Basel #apital Accords" of risk$ad(usted assets, wherey certain
assets !such as government onds" are considered to have lower risk and are either
partially or fully excluded from total assets for the purposes of calculating capital
adeGuacy. 5artly due to concerns aout asset inflation and repurchase agreements, capital
reGuirements may e considered more effective than depositNreserve reGuirements in
preventing indefinite lending+ when at the threshold, a ank cannot extend another loan
without acGuiring further capital on its alance sheet.
Reserve reGuirements
?n practice, many anks are reGuired to hold a percentage of their deposits as reserves.
&uch legal reserve reGuirements were introduced in the nineteenth century to reduce the
risk of anks overextending themselves and suffering from ank runs, as this could lead
to knock$on effects on other anks. &ee also money multiplier. As the early 7Cth century
gold standard and late 7Cth century dollar hegemony evolved, and as anks proliferated
and engaged in more complex transactions and were ale to profit from dealings gloally
on a moment's notice, these practices ecame mandatory, if only to ensure that there was
some limit on the allooning of money supply. &uch limits have ecome harder to
enforce. The 5eople's Bank of #hina retains !and uses" more powers over reserves
ecause the yuan that it manages is a non$convertile currency.
=ven if reserves were not a legal reGuirement, prudence would ensure that anks would
hold a certain percentage of their assets in the form of cash reserves. ?t is common to
think of commercial anks as passive receivers of deposits from their customers and, for
many purposes, this is still an accurate view.
This passive view of ank activity is misleading when it comes to considering what
determines the nation's money supply and credit. *oan activity y anks plays a
fundamental role in determining the money supply. The central$ank money after
aggregate settlement $ final money $ can take only one of two forms+
physical cash, which is rarely used in wholesale financial markets,
central$ank money.
The currency component of the money supply is far smaller than the deposit component.
#urrency and ank reserves together make up the monetary ase, called 2, and 27.
=xchange reGuirements
To influence the money supply, some central anks may reGuire that some or all foreign
exchange receipts !generally from exports" e exchanged for the local currency. The rate
that is used to purchase local currency may e market$ased or aritrarily set y the ank.
This tool is generally used in countries with non$convertile currencies or partially$
convertile currencies. The recipient of the local currency may e allowed to freely
dispose of the funds, reGuired to hold the funds with the central ank for some period of
time, or allowed to use the funds su(ect to certain restrictions. ?n other cases, the aility
to hold or use the foreign exchange may e otherwise limited.
?n this method, money supply is increased y the central ank when it purchases the
foreign currency y issuing !selling" the local currency. The central ank may
suseGuently reduce the money supply y various means, including selling onds or
foreign exchange interventions.
2argin reGuirements and other tools
?n some countries, central anks may have other tools that work indirectly to limit
lending practices and otherwise restrict or regulate capital markets. For example, a central
ank may regulate margin lending, wherey individuals or companies may orrow
against pledged securities. The margin reGuirement estalishes a minimum ratio of the
value of the securities to the amount orrowed.
#entral anks often have reGuirements for the Guality of assets that may e held y
financial institutions6 these reGuirements may act as a limit on the amount of risk and
leverage created y the financial system. These reGuirements may e direct, such as
reGuiring certain assets to ear certain minimum credit ratings, or indirect, y the central
ank lending to counterparties only when security of a certain Guality is pledged as
collateral.
=xamples of use
The 5eople's Bank of #hina has een forced into particularly aggressive and
differentiating tactics y the extreme complexity and rapid expansion of the economy it
manages. ?t imposed some asolute restrictions on lending to specific industries in 7CC8,
and continues to reGuire ,K more !AK" reserves from uran anks !typically focusing on
export" than rural ones. This is not y any means an unusual situation. The %&A
historically had very wide ranges of reserve reGuirements etween its do4en ranches.
/omestic development is thought to e optimi4ed mostly y reserve reGuirements rather
than y capital adeGuacy methods, since they can e more finely tuned and regionally
varied.
Banking supervision and oter activities
?n some countries a central ank through its susidiaries controls and monitors the
anking sector. ?n other countries anking supervision is carried out y a government
department such as the %1 Treasury, or an independent government agency !e.g. %1's
Financial &ervices Authority". ?t examines the anks' alance sheets and ehaviour and
policies toward consumers. Apart from refinancing, it also provides anks with services
such as transfer of funds, ank notes and coins or foreign currency. Thus it is often
descried as the 'ank of anks'.
2any countries such as the %nited &tates will monitor and control the anking sector
through different agencies and for different purposes, although there is usually significant
cooperation etween the agencies. For example, money center anks, deposit$taking
institutions, and other types of financial institutions may e su(ect to different !and
occasionally overlapping" regulation. &ome types of anking regulation may e delegated
to other levels of government, such as state or provincial governments.
Any cartel of anks is particularly closely watched and controlled. 2ost countries control
ank mergers and are wary of concentration in this industry due to the danger of
groupthink and runaway lending ules ased on a single point of failure, the credit
culture of the few large anks.
?ndependence
<ver the past decade, there has een a trend towards increasing the independence of
central anks as a way of improving long$term economic performance. Bowever, while a
large volume of economic research has een done to define the relationship etween
central ank independence and economic performance, the results are amiguous.
Advocates of central ank independence argue that a central ank which is too
susceptile to political direction or pressure may encourage economic cycles !'oom and
ust'", as politicians may e tempted to oost economic activity in advance of an
election, to the detriment of the long$term health of the economy and the country. ?n this
context, independence is usually defined as the central ank's operational and
management independence from the government.
The literature on central ank independence has defined a numer of types of
independence.
(egal independence
The independence of the central ank is enshrined in law. This type of independence is
limited in a democratic state6 in almost all cases the central ank is accountale at some
level to government officials, either through a government minister or directly to a
legislature. =ven defining degrees of legal independence has proven to e a challenge
since legislation typically provides only a framework within which the government and
the central ank work out their relationship.
)perational independence
The central ank has the independence to determine the est way of achieving its policy
goals, including the types of instruments used and the timing of their use. This is the most
common form of central ank independence. The granting of independence to the Bank
of =ngland in ,--A was, in fact, the granting of operational independence6 the inflation
target continued to e announced in the #hancellor's annual udget speech to 5arliament.
2anagement independence
The central ank has the authority to run its own operations !appointing staff, setting
udgets, etc." without excessive involvement of the government. The other forms of
independence are not possile unless the central ank has a significant degree of
management independence. <ne of the most common statistical indicators used in the
literature as a proxy for central ank independence is the 'turn$over$rate' of central ank
governors. ?f a government is in the hait of appointing and replacing the governor
freGuently, it clearly has the capacity to micro$manage the central ank through its choice
of governors.
?t is argued that an independent central ank can run a more credile monetary policy,
making market expectations more responsive to signals from the central ank. Recently,
oth the Bank of =ngland !,--A" and the =uropean #entral Bank have een made
independent and follow a set of pulished inflation targets so that markets know what to
expect. =ven the 5eople's Bank of #hina has een accorded great latitude due to the
difficulty of prolems it faces, though in the 5eople's Repulic of #hina the official role
of the ank remains that of a national ank rather than a central ank, underlined y the
official refusal to 'unpeg' the yuan or to revalue it 'under pressure'. The 5eople's Bank
of #hina's independence can thus e read more as independence from the %&A which
rules the financial markets, than from the #ommunist 5arty of #hina which rules the
country. The fact that the #ommunist 5arty is not elected also relieves the pressure to
please people, increasing its independence.
)overnments generally have some degree of influence over even 'independent' central
anks6 the aim of independence is primarily to prevent short$term interference. For
example, the chairman of the %.&. Federal Reserve Bank is appointed y the 5resident of
the %.&. !all nominees for this post are recommended y the owners of the Federal
Reserve, as are all the oard memers", and his choice must e confirmed y the
#ongress.
?nternational organi4ations such as the 3orld Bank, the B?& and the ?2F are strong
supporters of central ank independence. This results, in part, from a elief in the
intrinsic merits of increased independence. The support for independence from the
international organi4ations also derives partly from the connection etween increased
independence for the central ank and increased transparency in the policy$making
process. The ?2F's F&A5 review self$assessment, for example, includes a numer of
Guestions aout central ank independence in the transparency section. An independent
central ank will score higher in the review than one that is not independent.
#riticism
According to the Austrian &chool of =conomics, central anking plays an important role
in usiness cycles, according to the Austrian Business #ycle Theory. Bayek and 2ises
oth were ale to predict The )reat /epression.DAE The main proponents of the Austrian
usiness cycle theory are *udwig von 2ises.
B%*+ ,%&!
B%*+ ,ate at which central anks lend funds to national anks. The rate of discount
estalished y a country's central ank.
A central ank ad(usts the supply of currency within national orders y ad(usting the
ank rate. 3hen the central ank reduces the ank rate, it increases the attractiveness for
commercial anks to orrow, thus increasing the money supply. 3hen the central ank
increases the ank rate, it decreases the attractiveness for commercial anks to orrow,
conseGuently decreasing the money supply.
They print money, they control inflation, and much, much more. All you need to know
aout central anks is here. 3hat Are #entral Banks0
Few organi4ations can move the market like the Federal Reserve. As an investor, it's
important to understand exactly what the Fed does and how it influences the economy.
The Federal Reserve.
Bank rate, also referred to as the discount rate, is the rate of interest which a central ank
charges on the loans and advances that it extends to commercial anks and other financial
intermediaries. #hanges in the ank rate are often used y central anks to control the
money supply. Bank rate wesites such as BanxLuote provide greater efficiency and
transparency to the market creating a centrali4ed gateway for easy side$y$side review
and comparison, as well as a centrali4ed transaction platform that reduces the time and
effort reGuired y in$market consumers who would otherwise need to regularly call and
check numerous individual ank and mortgage wesites for interest rate Guotes and
updates. .
Difference bet#een Bank ,ate and ,epo ,ate
3hile repo rate is a short$term measure, i.e. applicale to short$term loans and used for
controlling the amount of money in the market, ank rate is a long$term measure and is
governed y the long$term monetary policies of the governing ank concerned.
Bank rate, also referred to as the discount rate, is the rate of interest which a central ank
charges on the loans and advances that it extends to commercial anks and other financial
intermediaries. #hanges in the ank rate are often used y central anks to control the
2oney supply
current ank rate at which RB? lends to Banks is ;K.
Repo rate 3henever the anks have any shortage of funds they can orrow it from the
central ank. Repo rate is the rate at which our anks orrow rupees from the central
ank. A reduction in the repo rate will help anks to get 2oney at a cheaper rate. 3hen
the repo rate increases orrowing from the central ank ecomes more expensive.
The Reverse repo rate is the rate at which the central ank orrows from the anks, while
the Repo rate is the rate at which the anks orrow from the central ank.
,egional Bank ,ate
Though influenced heavily y the none ?nterest rate, all ank rates will vary regionally. ?t
pays to compare interest rates on a regional or state$wide level.
-nited +ingdom
?n the %1 ank rates are set y the Bank of =ngland's 2onetary 5olicy #ommittee. The
key interest rate is called the official ank rate
D,E
which is the lowest rate at which the
Bank acts as lender of last resort to the money markets.
India
current repo rate is :.:CK !As on >uly 7C,C" !As these rates keep changing to know the
current rates please visit http+NNwww.ri.org.inNhome.aspx and see the #urrent Rates at
right hand side of the page"
Canada
?n #anada, the ank rate is defined as the upper limit of the overnight rate and
announced each month y the Bank of #anada, !making it the target overnight rate O
C.7:K".
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