The Functions of a Central Bank

The Functions of a Central Bank

1. Acts as a banker to the government

   • Revenue from tax is paid into the government's account at the central bank and payments by government for goods and services are made out of this account

2. Operates as a banker to the commercial banks

   • Holding accounts in the central bank enables commercial banks to settle debts between each other and to draw out cash, if their own customers are taking more cash from their branches than usual

3. Acts as a lender of last resort

   • Central banks lend to banks which are temporarily out of cash

4. Manages the national debt

   • The national debt is how much the government owes and overtime this builds up. The central bank carries out borrowing on behalf of the government by issuing government securities, for instance government bonds, pays interest on these and repays them when they fall due.

5. Holds the country's reserves and foreign currency

   • The central bank keeps foreign currency and gold to influence the exchange rate

6. Issues bank notes

   • The central bank is responsible for printing notes and destroying notes that are no longer suitable or distribution and circulation. The central bank also authorises the minting of coins.

7. Implements the government's monetary policy

   • The monetary policy has the prime aim of keeping inflation low and steady. This involves controlling the money supply and influencing interest rates throughout the economy, by changing the interest rate it charges on its loans. The government may instruct the central bank to increase or decrease the money supply. In some cases, central banks implements interest rate changes decided by their respective governments. In other cases, central banks have been given the responsibility to set interest rates.

8. Controls the banking system

   • Many central banks play a key role in regulating and supervising the banking system,

9. Represents the government

   • In meetings with the central banks and international organisations such as the World Bank and the International Monetary Fund