What’s The Job Of A Central Bank?

Central banks are somewhat different from private banking branches that provide personal and commercial banking services. They act as a brake that monitors and influences national economics and sets monetary policies to stabilise the financial system.

The aim of a central bank is not to compete or participate in the market but to assess and respond to factors such as inflation and set base interest rates against which all other financial institutions calculate their rates.

When an economy is experiencing high inflation, the central bank will often boost interest rates to try and slow growth and reduce rates when inflation is beneath the government target – currently two per cent in the UK.

Most central banks are entirely independent; yet report to the government and the population in general.

UK: The Bank Of England

The publicly owned Bank of England (BoE) was founded in 1694 and is one of the oldest central banks. Previously controlled by the Chancellor of the Exchequer, the BoE became autonomous in 1997 and now sets interest rates and monetary policy outside the political system.

Although its name refers to England, the BoE is responsible for stabilising GBP and overseeing financial systems across the UK.

Other tasks include:

  • Producing banknotes and managing credit and debit card payment systems.
  • Adjusting interest rates in line with inflation and living costs.
  • Mitigating risk within the UK financial system.

There are nine members of the Monetary Policy Committee, which sets interest rates. The government appoints four members, and the other five hold positions within the BoE – the Governor, three Deputy Governors, and the Chief Economist.

Although emergency meetings are called during an economic crisis, the committee typically gathers eight times yearly to decide policies and issue reports to the British public.

EU: The European Central Bank

The European Central Bank, or ECB, sets monetary policy affecting all members of the European Union and was first established in 1999.

It has a Governing Council comprising six executive members plus governors from each national central bank across the Eurozone countries.

The ECB is considered a conservative, cautious central bank, which usually provides an advance warning of planned interest rates and has the challenge of setting blanket monetary policies even though the individual economies of the member nations may be in different positions.

One of the core aims is to keep annual consumer price growth under two per cent as a way to maintain price stability and sustainable progression.

The EU depends on exports, so the ECB also looks to avoid making the euro excessively valuable because this could damage the beneficial export industry.

It has a council that meets twice weekly, although major policy decisions are typically made at one of 11 annual meetings.

United States: The US Federal Reserve

Commonly abbreviated to ‘the Fed’, the Federal Reserve is the United States central bank and one of the most important given the status of the US dollar in international trade and forex markets.

The US Dollar is used in roughly 90 per cent of all global currency transactions, so Federal Reserve policy changes can impact most currency valuations, even if indirectly.

It has five areas of responsibility:

  • To promote monetary policy
  • To maintain financial stability
  • To ensure financial institutions are sound
  • To support safe payments systems
  • To oversee consumer protections

Overall, the Federal Reserve works to ensure the US economy keeps running smoothly. It has three functional groups, each with a different remit and scope of responsibility.

The Board of Governors is independent of the US government and reports to Congress, with seven board members nominated by the President and confirmed by the Senate.

This board sets national targets, with each member also serving on the Federal Open Market Committee (FOMC).

FOMC members also include 12 presidents of US reserve banks, and the committee chair acts as the Federal Reserve Board chairperson. The group meets eight times per year to review the economy, financial systems and monetary policies.

Those 12 reserve banks are regional banks which each oversee a different area. The 12 banks are based in Boston, Atlanta, Chicago, Philadelphia, New York, Richmond, Minneapolis, Dallas, Kansas City, Cleveland, San Francisco and St Louis.

Canada: The Bank Of Canada

The Bank of Canada (BoC) is the central bank that manages financial and economic stability in Canada.

It is charged with responsibility for maintaining the supply and value of the Canadian dollar, implementing monetary policy, managing the national financial system and controlling public debt.

Canada has an inflation target of between one and three per cent, with a preferred level of two per cent, similar to the inflation targets set by the UK government.

Since 1998, the BoC has had a strong track record of keeping inflation within that range and is led by a Governing Council that convenes eight times yearly.

For a monetary policy to be confirmed, the BoC requires a consensus vote from the Governing Council, comprising the BoC Governor, four Deputy Governors and the Senior Deputy Governor.

The central bank also has an Executive Council that includes the governing board plus a Chief Operating Officer who creates strategic guidance for the organisation.

Japan: The Bank Of Japan

As another long-established central bank, the Bank of Japan (BoJ) was founded in 1882 and manages financial system stability and price movements, with a core focus on inflation.

Japan is heavily dependent on exports, so it takes an active role like the ECB in trying to ensure the currency doesn’t reach high enough valuations that it becomes uncompetitive on the global export market.

It can be decisive in influencing currency values and has previously taken steps to weaken the Japanese yen by entering the open market and selling the currency against euros and US dollars.

The BoJ has a Monetary Policy Committee that includes the bank’s Governor, two Deputy Governors and six other committee members. It is outspoken about currency strength and volatility issues and convenes eight times yearly.

Switzerland: The Swiss National Bank

Although Switzerland is a European country, it is not a full EU member and has its own independent central bank called the Swiss National Bank (SNB).

The bank aims to control price stability and oversee the Swiss economy, with one office in Zurich and one in Berne.

With an export dependency similar to the EU and Japan, the SNB is also invested in preventing the Swiss franc from becoming too strong and tends to be conservative with interest rate rises and other sweeping policies.

The SNB has a committee that decides interest rates, comprising three members, although the group sets interest rate bands instead of setting a specific interest rate target.

Committee members meet once per quarter to review performance against targets.

Australia: The Reserve Bank Of Australia

Australia’s central bank, the Reserve Bank of Australia (RBA), follows a remit established in the 1959 Reserve Bank Act, with a mandate to ensure the Australian dollar is stable, drive towards 100 per cent employment, and protect the wealth and welfare of Australian citizens.

It has a Monetary Policy Committee that includes the bank’s Governor, Deputy Governor, Secretary to the Treasurer, and six independent representatives appointed by the Australian federal government.

The RBA sets annual inflation targets of between two and three per cent, and the committee meets 11 times yearly on the first Tuesday of each month.

New Zealand: The Reserve Bank Of New Zealand

One of the differences between the Reserve Bank of New Zealand and other central banks is that the Governor holds the ultimate decision-making powers rather than relying on a consensus from the committee, which meets eight times yearly.

The RBNZ has maintained stable inflation targets within a range of one to three per cent and has followed this same strategy since 2000. However, it also sets medium-term goals with a 1.5 per cent inflation target.

If the RBNZ fails to meet its targets, the central bank Governor can be dismissed.

The RBNZ is responsible for maintaining sustainable employment levels and ensuring the national financial system is sound.

What’s The Job Of A Central Bank FAQs

What are the biggest responsibilities of a central bank?

Central banks oversee national finances and economics and usually operate independently from politics – although not in every case.

The three primary tasks are ensuring the national currency remains stable, preventing or mitigating inflation impacts and keeping unemployment levels low.

What is the UK’s central bank?

The central bank responsible for each UK nation is the Bank of England.

Who is in charge of running the US Federal Reserve?

Seven governors, nominated by the US President and confirmed by the Senate, control the reserve.

Do all countries have a central bank?

Not necessarily, although the vast majority do – there are over 200 central banks globally, with 76 having an active role in international economics.

Which countries don’t have a central bank?

Nations without a central bank include Micronesia, Nauru and Monaco.

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