The fundamental responsibility of every Central Bank is to shape the economic policies and financial markets. Central Bank acts as a regulatory body that regulates the monetary policy, financial regulation of a country. Central bank acts as an agency responsible for the settlement of claims of Commercial banks against eachother through book entries of transfer to or from their accounts. This responsibility is called Clearing house function of Central bank. There are many tools that Central bank use to perform its responsibilities in a diligent manner. Some of these tools are:
Monetary policy
It is an important tool for every Central Bank to control the money supply in the economy. Their role is to set (increase/decrease) interest rates, maintain foreign currency reserves, assist the government in making policies for importers/exporters, and to maintain a sustainable value of native currency. Usually Monetary Policy is meant to maintain a low inflation rate and sustainable GDP growth (avoiding over-heating of economy). As the economy experiences unsustainable consumption growth(over-heating), the Central bank immediately increases the interest rates to reduce the flow of cash in the economy and to control inflation. Central Bank acts as an agent for the government as they assist the government in managing it’s debts and obligations, processing of payments to foreign creditors and issuance of governmental securities.
Currency Management:
Central bank is responsible to manage the national currency by ensuring requisite supply of money to meet the economy’s demand and to control the valuation of national currency and inflation.
Management of Foreign Exchange Reserves:
Central bank is responsible to manage the foreign exchange reserves and to make necessary intervention to stabilise the exchange rate. This may include buying and selling of foreign currencies for the maintenances of desired level of reserves.
Conducting Trend Analysis:
Central bank conducts analysis on numerous macro economic indicators i.e. (inflation, unemployment rate etc). Central bank then publishes it's annual analysis report along with economic forecasting. These analysis are meant to neutralise the economic risks.
Judicious Oversight, Control and Management:
It is the role of Central Bank to ensure that every financial institution within the country is operating in a secure and safe manner as these institutions are directly aligned to the public interest. Prudent control and management of these financial institutions can be done by taking actions against financial institutions especially commercial banks that are not complying with the rules, procedures and regulations made by the Central Bank. Central Bank usually conducts regular evaluation to examine the procedural conduct of banks. Central Bank requires commercial Banks to use risk free management protocols.
Financial Regulations:
- It is the prime responsibility of Central Bank to regulate commercial banks by setting reserve requirements i.e. (holding money in reserves and cash to ensure that these banks have enough liquidity to meet the depositor’s obligations).
- Setting capital requirements (to ensure that commercial banks have enough equity relative to their assets so that investors and customers can be protected in case of any unfortunate bank failure).
- Providing commercial Banks liquidity (to reduce the stress on these financial institutions at the time of crisis and to hinder the liquidity and financial crisis from spreading on a wider scale).
From the above discussion we can conclude that Central bank plays a vital role in the overall management of an economy. Its main role is to assist the country in achieving a sustainable economic growth through various measures as discussed above in the article. Maintaining stability in the economy and preventing balance of payment crisis are some of its core responsibilities.
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