4.4.3 Role of central banks

• Central bank


  Manages the currency, money supply and interest rates in an economy
• Implementation of monetary policy

  1. Influence the manipulation of interest rates

  2. Influence the supply of money and credit

  3. Influence the exchange rate
• Monetary Policy Committee (MPC)


  Alters interest rates to control the supply of money, independent from the government, meets monthly to discuss interest rate
• Interest rates


  Used to help meet the government target of price stability, alters the cost of borrowing and reward for saving
• Base rate


  Controlled by the central bank, ultimately controls the interest rates across the economy
• Central bank


  • Provides services to the Central Government
  • Collects payments to the governments and makes payments on behalf of the government
  • Maintains and operates deposit accounts of the government
  • Manages public debt and issues loans
  • Can advise the government on finance, including the timing and terms of new loans
• Lender of last resort

  • If there is no other method to increase the supply of liquidity when it is low, the central bank will lend money to increase the supply
  • If an institution is risky or is close to collapsing, the central bank might lend to them
• Borrowing from the lender of last resort

  Suggests the bank is experiencing a financial disaster, so banks usually avoid it
• Role in regulation of the banking industry

  • Governments regulate banks with regulation and guidelines to ensure the behaviour of banks is clear
  • Helps to ensure the safety and stability of banks, building societies, investment firms and credit unions, and ensures policyholders are protected
  • Regulates financial firms to ensure they are being honest to consumers and seeks to protect consumer interests
  • Aims to promote competition which is in the interests of consumers
• Some economists argue that the banks have a huge influence in the economy; if they failed it would have huge consequences. Therefore, it is important to regulate the banking industry.