Central Banks

The central bank is a bank that provides financial services to the government and the commercial banks of its country.

The main functions of the central bank are:
  • money supply and exchange rate regulation;
  • control of the release of national currency's notes;
  • lending and accepting deposits from commercial banks, as well as control of their activity;
  • management of a country's debt;
  • maintenance of the gold currency reserves of the country;
  • interaction with other central banks.
There are four main ways that central banks influence the foreign exchange market:
  • Interest rate changing. Central banks increase interest rates in such a way that they make the currency of their country attractive to investors but complicate the life of commercial banks. For investors, savings in the currency of the country will bring more revenue, but for the commercial banks, it will cause a situation wherein lending money from central banks will cost more for them, which will automatically lead to an increase in interest rates for lending and deposit funds for the people. By cutting interest rates, the process is reverse.
  • Financial market instruments. These are usually direct transactions with securities on the open market. Purchase of securities by the central bank leads to the increase of its reserves, which makes it possible to increase the volume of lending to enterprise in the various sectors of the economy, or lending of commercial banks, which lend money to these organizations in turn (depending on the structure of the interaction in one particular country). In such a way, the central bank stimulates the development of the economy. By selling securities, the reserves of the bank decrease as well as the possibility of credit from the bank, which causes a dampening effect on the economy.
  • Reserve requirements changing. By changing these conditions, the central bank can limit the volume of credits, issued by the commercial banks, which will cause a change in the amount of money in the country.
  • Foreign exchange operations. Central banks can operate on the foreign exchange market to cheapen/strengthen the national currency (intervention) or vice versa and hold it on a certain level. This is done by infusing or exempting the national currency into or from the international market. Also, central banks can place their assets in other central banks and directly exchange currency.
Central Bank influence

Central banks, such as the Federal Reserve System (U.S.A.), the European Central Bank (Europe), the Bank of England (Great Britain), the Bank of Japan (Japan), the Swiss National Bank (Switzerland), the Bank of Canada (Canada), the Reserve Bank of Australia (Australia) and the Reserve Bank of New Zealand (New Zealand) are the biggest and most powerful banks in the world, which have their impact on Forex.

The Federal Reserve System U.S.A.

The European Central Bank

The Bank of England

The Bank of Japan

The Swiss National Bank

The Bank of Canada

The Reserve Bank of Australia

The Reserve Bank of New Zealand

by JustMarkets, 2016.10.24

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