Central Banks

What Is A Central Bank?

A central bank manages a nation's currency, money supply and interest rates and acts as a lender of last resort to the country's banks. Many are also responsible for regulating and supervising their country's banks. Many are set up to be independent from their government, although their directors are usually appointed by that country's chief executive or leader of government.[1]

Most countries have their own central bank, but the following eight have influence beyond their borders:

The Swedish Central Bank, Sveriges Riksbank, says it is the oldest central bank in the world, with operations beginning in 1668.[2]

The Bank of England was founded shortly after that, in 1694, as a private bank to act as banker to the government.[3] It was nationalised in 1946 and then was granted independence from the government in 1997. It is responsible for setting monetary policy and interest rates, maintaining financial stability, and regulating the country's banks and insurance companies.[4]

Trade the News: View our Economic Calendar

Monetary Policy

The goal of central banks is to ensure economic and financial stability, which usually means low inflation, low to moderate interest rates, high levels of employment and sustainable economic growth. They do this through monetary policy, which they try to achieve through public pronouncements of their intentions plus open market operations to manage the money supply and the level of interest rates.[1]

The main mechanism available to central banks for implementing monetary policy is by influencing the level of interest rates and the amount of money banks have available to lend.

An accommodative monetary policy means the central bank wants low interest rates and more money available in the economy to encourage economic activity. However, if the central bank determines that the economy is growing too fast and may ignite inflation, it tightens monetary policy by raising interest rates and restricting the amount of money available in the financial system.[5]

In the U.S., for example, the fed's monetary policymaking unit is the Federal Open Market Committee (FOMC). It sets the federal funds rate, which is the interest rate that banks pay to borrow and lend money to each other overnight that they hold on deposit at the Fed. This rate influences to a great deal the general level of all interest rates throughout the economy, both short- and long-term.[6]

Open Market Operations

In addition to setting key interest rates, central banks have other tools they use to keep interest rates within the desired range.

Through open market operations, they buy and sell securities with banks and other financial institutions. By selling securities, they drain money from the financial system, reducing the amount available for lending and therefore putting upward pressure on interest rates. Buying securities has the opposite effect, making more money available for banks to lend and therefore lowering rates.

Central banks also dictate the amount of money commercial banks must keep on deposit in cash. By lowering these requirements, banks have more money to make loans, while raising them has the contrary effect.

The Money Supply

Central banks also have some level of control over the money supply, which is the amount of money circulating in the economy. This can also affect interest rates. A plentiful supply of money generally means low rates, while less money available makes borrowing more expensive and therefore discourages business activity. The central bank can increase or reduce the size of the money supply by buying and selling securities.

Since the late 1980s, however, many central banks in the developed world have moved away from trying to manipulate the size of the money supply and instead focus on trying to target an optimum level of inflation, usually about 2% a year. According to the International Monetary Fund, which provides policy advice and technical assistance to countries, many low-income nations are also transitioning away from trying to target the size of the money supply in favour of targeting inflation.[1]

Unconventional Policies

In the wake of the global financial crisis in 2008, many central banks eased monetary policy by cutting short-term interest rates to zero. In some cases, they took the unprecedented step of lowering rates below zero, as in the case of the European Central Bank, the Swiss National Bank and others.[1]

When that failed to achieve the desired result of raising inflation and boosting economic growth, many of them undertook "unconventional monetary policies" including quantitative easing. This policy consists of buying long-term bonds, both issued by the government and from private corporations, in order to try to lower long-term rates and to encourage investors to take on more risk by buying stocks instead of bonds.[1]


A central bank manages a nation's currency, money supply and interest rates and serves as a lender of last resort to the country's banks. Many of them also regulate the banks in the country. Central banks try to achieve their goals, which usually consist of promoting economic growth, job creation and low inflation and interest rates, through their monetary policy. They conduct the policy through a combination of raising and lowering interest rates, and open market operations, buying and selling securities to increase or decrease the amount of money available for lending.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



Retrieved 25 Jan 2019 https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-and-Central-Banking


Retrieved 25 Jan 2019 http://blog.swedenabroad.se/uk/2012/11/03/the-worlds-oldest-central-bank/


Retrieved 25 Jan 2019 https://www.bankofengland.co.uk/about/history


Retrieved 25 Jan 2019 https://www.bankofengland.co.uk/about/governance-and-funding


Retrieved 25 Jan 2019 https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm


Retrieved 25 Jan 2019 https://www.federalreserve.gov/faqs/about_12844.htm

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.