4.4.3 Role of Central Banks

Define the Central Bank.

• A public institution that delivers monetary and financial stability. The exact responsibilities vary from country to country.

What are the 4 key functions of the Central Bank?

• Implementation of monetary policy

• Regulates financial firms

• banker to the government

• Banker to commercial banks (lender of last resort)

How is implementation of monetary policy a key function of the CB?

• Managing the inflation target- The Monetary Policy Committee aims to achieve this by setting interest rates with the goal of reaching the government’s 2% inflation target.

How is regulation of financial firms a key function of the CB?

• The main objective is to make sure that the system runs smoothly and that people can trust financial institutions.

• Ensuring the safety of payment system. The Bank of England regulates and oversees key payment systems such as BACS which transfer money between banks

How is the CB being a banker to the government a key function?

The Bank of England handles all items of tax revenue and government expenditure of behalf of the government

How is the Banker to commercial banks ( lender of last resort) a function of the CB?

• The bank also holds reserves of commercial banks, which act as a stock of liquid assets but also provides funds for the interbank lending market to function. BoE offers loans (liquidity) to financial institutions which are in serious difficulty or near collapse, especially during times of financial stress.

What are 2 teeny cutesy roles of the central bank?

• Issues bank notes

• Manage foreign exchange reserves