<Last updated 25.04.2020>
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)
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