“Central Banks and Policy

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 25.04.2020>

Dear reader,

Hi! If you are interested in Forex and CFDs please read carefully the below article so you can be prepared and fully informed about the financial markets.

 

A Central Bank is a financial institution, an independent national authority that is responsible for overseeing the monetary system and policy of a nation or group of nations, conducts monetary policy, regulates banks, regulating its money supply, sets interest rates and provides financial services. Its goals are to stabilize the nation’s currency, keep unemployment low, and prevent inflation.

To keep inflation at a comfortable level, central banks will mostly likely increase interest rates, resulting in lower overall growth and slower inflation. Loans just become more expensive while sitting on cash becomes more attractive.

Currencies rely on interest rates because these dictate the flow of global capital into and out of a country. They are what investors use to determine if they’ll invest in a country or not. An interest rate increase in one currency combined with the interest rate decrease of the other currency is a perfect equation for sharp swings!

We care about inflation because it affects purchasing power and so value of money > If you had a bond that carried a nominal yield of 6%, but inflation was at an annual rate of 5%, the bond’s real yield would be 1%.

 

What are the types of monetary policy?

Contractionary or restrictive monetary policy takes place if it reduces the size of the money supply. It can also occur with the raising of interest rates. The idea here is to slow economic growth with the high interest rates. Borrowing money becomes harder and more expensive, which reduces spending and investment by both consumers and businesses.

Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate.

Finally, neutral monetary policy intends to neither create growth nor fight inflation. central banks usually have an inflation target in mind, say 2%.

We normally see interest rate changes of .25% to 1% at a time. Remember that central banks want price stability, not shock and awe. Central banks are communicating their plans with the market.

 

When are the Central Banks Hawkish or dovish?

Central banks are described as “hawkish” when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment. “Dovish” central bankers, on the other hand, generally favor economic growth and employment over tightening interest rates.

 

> List of The Major Central Banks

Federal Reserve (Fed)

European Central Bank (ECB)

Bank of England (BOE)

Swiss National Bank (SNB)

Reserve Bank of New Zealand (RBNZ)

Bank of Japan (BOJ)

Reserve Bank of Australia (RBA)

Bank of Canada (BOC)

 


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
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