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Why Trade Indices CFDs
Central banks are tasked with the regulation of other banks in the country as well as the formulation and implementation of monetary policies that will help grow and sustain the underlying economies.
This important role is the main reason why central bank meetings are crucial events for market participants.
Major global central banks meet periodically to set the monetary policy environment that will help them to realise their objectives.
These objectives can be target inflation, the unemployment rate and overall GDP. A major threat to sustainable economic growth is price stability, and this generally tops the agenda of central bank meetings.
In addition to targeting inflation, central banks can also directly interfere in the markets to influence the demand and supply of money.
To achieve their motives, central banks utilise various tools that include:
- Interest Rates. Central banks can hike or cut interest rates when lending to other banks. Rate hikes make the underlying currency more expensive, which limits supply. Rate cuts increase supply, making the underlying currency cheaper.
- Direct Involvement in the Market. Central banks can engage in the open market by directly buying or selling government bonds and treasuries or commercial debt. This can increase the supply of money in the economy or reduce it.
- Minimum Reserve Requirements. Central banks institute minimum reserve amounts that other banks must hold at any given time. If the amount is raised, banks will have fewer resources to offer their services; but if the amount is reduced, the banks will have more resources to serve their customers.
Most Important Banks in the World
The most important central bank in the world is, without doubt, the US Federal Reserve. This is because of the country’s standing in the global economy as well as the power of the US dollar in international trade.
Other influential central banks include the European Central Bank (which covers the bulk of Europe), Bank of England, Bank of Canada, Bank of Japan, People’s Bank of China, Swiss National Bank, South African Reserve Bank, Reserve Bank of New Zealand, and the Reserve Bank of Australia.
The central bank meetings are lagging economic indicators, as the monetary policy decisions reflect the bank’s outlook on the future while the economy is evaluated in retrospect. Investors trust the central banks as a key source of information for their respective economies and seek to position themselves advantageously before the central bank expectations are realised.
The U.S. Federal Reserve System (FRS), also called the Federal Reserve or simply the Fed is the Central Bank of the United States of America. It was established to provide a flexible, secure, and steady system for national monetary and financial affairs.
The European Central Bank (ECB) is the top monetary institution in the European Union (EU), governing the Euro currency (EUR) and the monetary and financial affairs in the region. It was established on June 1, 1998, as one of the seven EU institutions which were agreed upon in the Treaty of Amsterdam.
The Bank of England (BoE) is the United Kingdom’s central bank and serves the U.K. government as the official banking institution for monetary affairs. As the top monetary and financial authority in the United Kingdom, the Bank of England assumes the role of guarding the wellbeing of the British economy as well as the financial system.
The Swiss National Bank (SNB) is the central bank of Switzerland, and it has the responsibility to formulate the country’s monetary policy as well as administer Swiss franc banknotes. Read on how to use it’s announcements in fundamental analysis
The Bank of Japan (BoJ) is Japan’s central bank and the country’s highest monetary authority. The bank is headquartered in Nihonbashi, the business district of Chūō, Tokyo. It was established under the 1882 Bank of Japan Act and began operating on October 10, 1882, before issuing its first currency notes in 1885.
The Reserve Bank of Australia (RBA) is the central bank of Australia, whose express function is to support and enhance the economic and financial stability of the country. RBA derives its mandate from the Reserve Bank Act of 1959 that granted the bank powers to contribute to the stability of the Australian dollar, to achieve full employment and to drive economic prosperity.
The Canadian central bank was founded in 1934, and it is responsible for promoting a safe and sound financial system within Canada as well as for formulating the monetary policy of the country.
The Reserve Bank of New Zealand, also referred to as the RBNZ, is one of the leading apex banks in the world. It is the central bank of New Zealand, and it was created by the New Zealand government with the purpose of maintaining the stability of the country’s financial system.
The People’s Bank of China (PBOC) is the central bank of the People’s Republic of China. Like other central banks, the PBOC has the dual mandate of fostering financial stability and enhancing economic prosperity in China. The bank has undergone a series of reforms and now enjoys a great deal of autonomy by Chinese standards.
The South Africa Reserve Bank (SARB) is the central bank of the Republic of South Africa. The bank has a responsibility to maintain price stability, which, in turn, cultivates and supports balanced, sustainable economic prosperity for the people of South Africa. Learn how to use it in fundamental analysis.