What are central banks and interest rates? How do they influence the market? What are their roles and key responsibilities in the global financial ecosystem? These are the questions many beginners ask when starting trading currencies and some other instruments. The entire system of central banks is quite complex. The first and foremost thing you need to know is that they are responsible for keeping the nation’s monetary system under control.
Besides, central banks have other specific tasks and obligations such as keeping the nation’s currency stable, lower inflation or improving the employment rate in the region. Also, they appear to be the main currency issuers in the country. Central banks regulate interest rates and credits, supervise commercial banks, keep exchange services and platforms under control, etc.
However, what is the role of central banks in the market? This is what we are going to find out today.
But first, we need to clarify some key aspects of these financial and regulative institutions. To keep the situation and market under control, central banks use the following major tools:
Often, central banks serve as last resort lenders to keep investors confident about the fact that their financial obligations will be met and fulfilled.
They can be different depending on the country along with its economic and geopolitical situation. However, the main goal is to meet public interests. The key responsibilities include:
Here is the list of globally recognizable central banks that play a huge role in the worldwide economic formation as well as in the market:
Of course, those are not all of the most influential central banks. As a trader, you will also need to consider the central banks of Japan and Canada, Swiss National Bank, reserve banks of New Zealand and Australia, etc.
Central banks set not only their interest rates, which refer to commercial banks eager to borrow funds but also those referring to individual loans, credit cards, etc. Commercial banks often borrow money from central banks in case they do not have enough funds of their own to comply with Fraction Reserve Banking in its modern form.
Besides, commercial banks need funds to ensure a stable money flow to provide credits, let clients withdraw enough cash, payout investors’ commissions, and more. They usually establish interest rates that are higher than central bank interest rates, as this is the only chance for commercial organizations to generate profits.
For this reason, traders always keep an eye on the interest rate changes, as it can have a significant effect on the market.
Traders are always in search of clues and pieces of evidence of the central bank chairman’s immersion to decrease or increase the interest rate. This is where you will have to learn several terms that will help you to interpret the information correctly.
The first term is “Hawkish”. It refers to central banks that plan or just about to increase the interest rate.
The term “Dovish” means that central banks are planning or just about to cut down on the interest rate.
When you hear the term “Quantitative easing”. It means that central banks are planning to purchase long-term bonds from some of their holdings. It will lead to increased demand in those particular bonds.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.