The role of the central bank

What are the key responsibilities of a central bank?

Managing the currency, money supply, and interest rates of an economy.

Give three examples of central banks.

The European Central Bank (ECB), the Bank of England, and the People’s Bank of China.

How does the central bank influence the economy through monetary policy?

By manipulating interest rates, money supply, and the exchange rate.

What is the role of the Monetary Policy Committee (MPC) in the UK?

It sets the base interest rate each month to meet the government’s target of price stability. The MPC also assesses economic conditions and adjusts monetary policy as needed to promote economic growth and stability.

How do interest rates influence the economy?

They affect the cost of borrowing and the reward for saving, influencing spending and inflation.

How does the central bank act as a banker to the government?

It collects and makes payments, manages government accounts, issues loans, and advises on financial matters.

What does "lender of last resort" mean?

The central bank lends money to financial institutions when liquidity is low and no other funding is available.

Why is the lender of last resort important?

It helps prevent a bank collapse and protects consumers from losing deposits.

What is a ‘run on the bank’?

When consumers panic and rapidly withdraw their deposits, fearing the bank will fail.

Why do banks avoid borrowing from the lender of last resort?

It suggests the bank is in financial distress.

Why is bank regulation important?

Because bank failures can have serious consequences for the economy.

What are the main UK regulators for the banking industry?

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

What is the role of the FCA?

To ensure honesty, protect consumers, and promote competition.

What is the role of the PRA?

To promote the safety and stability of banks and protect policyholders.