Role of a central bank

centralni banka

Role of a central bank

The central bank is established by the government but is partly independent of it, e.g. when appointing a governor. The central bank performs several basic tasks, including regulating the money supply, setting lending conditions or supervising the activities of commercial banks. Last but not least, it has an issuing function, a privileged right to issue banknotes and manages currency reserves.

What is a central bank

A central bank is a public institution managing a country’s currency and regulating the money supply, i.e. the amount of money in circulation. Central banks are mainly tasked with maintaining price stability and can determine interest rates. However, the central bank is not a commercial bank, so you cannot open an account with it or apply for a loan.

But the central bank acts as a bank for commercial banks. This activity affects the flow of money and credit in the economy and thus ensures stable prices. For commercial banks to cover their short-term needs, they can borrow money from the central bank. However, they must provide security against this loan – property with a particular value, ensuring that the loans are repaid.

Central bank activities

The central bank implements monetary policy, manages the state currency and supervises the activities of commercial banks. It provides loans, licenses and conditions for the operation of these banks and other financial institutions. The central bank also maintains a state budget account.

Other central bank tasks include monitoring the amount of money and influencing it. The central bank also manages foreign exchange reserves, i.e. reserves in gold and foreign currencies. The bank’s primary tool is to set interest rates. The rates of individual commercial banks on the interbank market are then derived from them.

Conclusion

The central bank’s primary goal is to create the conditions for sustainable economic growth. The result should then be a low-inflation environment in the economy.

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