What Do Central Banks Do?Much of this section of the site has looked at the power over the markets that companies or individuals hold. But what about Central Banks? Are they not the biggest force in a market? Central banks are organisations established by government to oversee the smooth running of an economy and often the regulation of financial services products and stock markets. They are also usually charged with the task of money creation - the actual printing of bank notes. Though it must be admitted that this is a task that in the modern world would usually be outsourced to a specialist service provider.
Therefore, some of the most influential banking institutions include the Bank of Japan, the Bank of England (United Kingdom), the Federal Reserve (USA), the European Central Bank (ECB) and the Bank of China. In an effort to try and maintain balance in an economy, it is usually the job of the central bank to maintain inflation at an acceptable rate. This target rate would usually be determined by government. The bank would usually use interest rates as a tool to control growth and inflation rates. Underlying interest rates - the rate borrowers pay on loans and savers receive on cash investments - can have a very major impact on economic factors such as consumer spending. For example, most families in developed economies will own a home but that home will be mortgaged to a bank or other lender. By making the monthly cost of interest payments higher or lower, a central bank can influence the amount of spare money in a family budget. Multiply this effect across millions of households and the power soon becomes clear! The decision to alter interest rates is very major. The stock market will almost certainly react strongly to such moves and for a few hours or perhaps even a few days, prices will be quite volatile as different companies are reevaluated in light of this change in circumstances.
This means that central bankers have the unenviable task of trying to predict the state of the economy long into the future when there are many imponderables and unknowns that can have a major impact. For this reason, many economists are highly critical of decisions - it is easy to get decisions wrong in such circumstances - but would never wish to have to make these decisions themselves. A lesser recognised tool for economic control is the supply of money into an economy and the rate at which 'old' money is retired. Some central banks still have the power to decide on the amount of funds an economy requires, though in many countries, politicians have wrested this decision from them. That means that politicians can make spending decisions that are independent of banker control.
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