Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “a central bank”
Every country has a central bank, in the U.S. it is the Federal Reserve, in the UK it is
the Bank of England and for Europe it is The European Central Bank. The primary function
of a central bank is to manage the nation’s money supply, through active duties such as
managing interest rates, setting the reserve requirement, and acting as a lender of last
resort to the banking sector during times of bank insolvency or financial crisis.
The central bank has been described as “the lender of last resort”, which means that it
is responsible for providing its economy with funds when commercial banks cannot cover a
supply shortage. In other words, the central bank prevents the country’s banking system
from failing. However, the primary goal of central banks is to provide their countries’
currencies with price stability by controlling inflation. A central bank also acts as the
regulatory authority of a country’s monetary policy and is the sole provider and printer
of notes and coins in circulation. Time has proved that the central bank can best function
in these capacities by remaining independent from government fiscal policy and therefore
uninfluenced by the political concerns of any regime. The central bank should also be
completely divested of any commercial banking interests.