Central Banks

The central bank is the highest financial institution of a country or region. It is responsible for formulating and executing monetary policies, maintaining financial stability, managing foreign exchange reserves, supervising and regulating financial markets and financial institutions, and providing financial services and payment systems. The status and functions of central banks vary in different countries or regions. 

Major Central Banks in the World

Federal Reserve (Fed)

The central bank of the United States, which issues U.S. dollars, is one of the most influential central banks in the world. The Fed adopted large-scale quantitative easing policies and asset purchase programs during the financial crisis and the new coronavirus epidemic, and established liquidity swap arrangements with other major central banks.

European Central Bank (ECB)

The central bank of the Eurozone issues the euro, the second largest reserve currency in the world. The ECB adopted negative interest rate policies and asset purchase programs during the financial crisis and sovereign debt crisis, and pledged to "do all it can" to protect the euro zone.

Bank of Japan (BOJ)

Japan's central bank issues the yen, the world's third largest reserve currency. When BOJ faced deflationary pressure and low growth problems for a long time, it adopted innovative measures such as quantitative easing policy and long- and short-term interest rate operations to pay quantitative and qualitative financial easing policies.

People's Bank of China (PBOC)

China's central bank issues the yuan, the fifth largest reserve currency in the world. PBOC has played an important role in promoting China's economic transformation and financial reform, and promoted the internationalization and liberalization process of the RMB.

Bank of England (BOE)

The UK's central bank issues the pound, the fourth largest reserve currency in the world. BOE adopted quantitative easing policies and asset purchase plans during the financial crisis and Brexit, and actively participated in the coordination and cooperation of international financial affairs.

Characteristics of central banks

Independence

When the central bank formulates and implements monetary policy, it is not subject to interference from the government or other external forces. It is only responsible for reporting and explaining its policy objectives and decisions to the public or institutions such as Congress. This can ensure the professionalism and credibility of the central bank and avoid the influence of political factors on monetary policy.

Responsibility

While enjoying independence, the central bank must also assume corresponding responsibilities, especially for the achievement of its policy objectives and economic and social development. Therefore, the central bank must regularly publish its policy assessments and forecasts to the public or institutions such as Congress, and promptly adjust its policy tools and measures to adapt to changes in the economic environment.

Publicity

The central bank must maintain the transparency of its policy decision-making process and results, and promptly disclose its policy objectives, reasons, methods, effects and other information to the public or Congress and other institutions. This can enhance the credibility and efficiency of the central bank and promote the formation and coordination of market expectations.

Coordination

When performing its functions, the central bank must maintain good communication and cooperation with other domestic and foreign financial regulatory authorities, government departments, international organizations, etc. to achieve common goals and interests. For example, when dealing with a financial crisis, the central bank must coordinate with other relevant departments to take rescue measures; when participating in international financial affairs, the central bank must negotiate with the central banks of other countries or regions to formulate rules and arrangements. 

Main Functions of Central Bank

1. Maintain the stability of the value of the currency and protect the economic well-being of the nation by controlling inflation or deflation.

2. Regulate the liquidity of financial markets and influence market interest rates and credit supply and demand through open market operations, interest rate policies, reserve ratios and other tools.

3. Acts as the government's bank and bank of banks, manages the government's funds and debts, provides lender of last resort functions, and supports the clearing and payment systems of financial institutions.

4. Supervise financial activities, formulate and implement financial regulations and supervision standards, and prevent and deal with financial risks and crises.

5. Participate in international financial affairs, manage foreign exchange reserves and foreign exchange markets, participate in international financial organizations and agreements, and promote international financial cooperation and stability.

The Impact of the Central Banks on the Forex Market

1. Through monetary policy, domestic interest rates and inflation are adjusted, affecting the supply, demand and purchasing power of the domestic currency, which in turn affects the exchange rate of the domestic currency against foreign exchange.

2. Through the management of foreign exchange reserves, the supply, demand and price of foreign exchange are adjusted, and the exchange rate of the domestic currency against foreign exchange is affected. The central bank can increase or decrease the circulation of domestic currency by selling or buying foreign exchange, thereby maintaining or adjusting the exchange rate of the domestic currency.

3. Through foreign exchange control and supervision, regulate and supervise the foreign exchange trading activities of financial institutions and individuals, and prevent and deal with foreign exchange risks and crises. The central bank can affect the cost and efficiency of foreign exchange transactions by setting limits, tax rates, reporting systems and other measures for foreign exchange transactions, thereby affecting the supply, demand and price of the foreign exchange market.

4. Promote and maintain international financial stability by participating in international financial cooperation, coordinating and negotiating foreign exchange policies with other countries or regions. The central bank can influence the international financial order and rules by participating in international financial organizations and agreements, such as the International Monetary Fund (IMF), Special Drawing Rights (SDR), Bretton Woods System, etc., thereby affecting the development and changes of the foreign exchange market.