Basic functions of central banks
Central banks are essential institutions that manage the national currency and they guarantee economic stability through monetary policy. Its main function is to maintain price stability and control inflation to foster a healthy economic environment.
These bodies do not operate as commercial banks for the public, but rather act as banks of banks, facilitating liquidity and regulating the operations of the financial system. Their actions directly influence the economy of the country or region they manage.
Currency management and price stability
The central bank controls the amount of money in circulation, seeking to keep inflation under control and avoid devaluation. This is vital to preserve the purchasing power of the currency and public confidence.
To achieve price stability, adjust interest rates and the money supply, using tools such as rate setting and open market operations. These actions regulate the cost of money and access to credit.
The price stability it is a key objective because it creates an appropriate environment for sustained economic growth and job creation, fundamental aspects for sustainable economic development.
Relationship with commercial banks and services
Central banks do not provide direct services to consumers, but rather work with commercial banks, providing liquidity and facilitating their operation. This ensures the correct circulation of money in the economy.
In addition, they establish minimum reserve requirements for commercial banks, regulating their ability to grant credit. Thus, they control financial risks and maintain the stability of the banking system.
This relationship allows the financial system to function with confidence and efficiency, ensuring that banking transactions and operations are carried out in a secure and orderly manner.
Tools of monetary policy
The tools of monetary policy allow central banks to influence the economy by controlling the money supply and interest rates. These tools are essential to achieve financial stability.
Through the proper application of these measures, access to credit is adjusted and liquidity is regulated, facilitating a stable economic environment that favors growth and controls inflation, key objectives of monetary policy.
Setting the target interest rate
The target interest rate is the main tool that central banks use to influence the cost of money. By modifying this rate, the credit activities of households and companies can be stimulated or stopped.
Reducing the interest rate reduces the cost of loans, encouraging consumption and investment, which can increase the money supply and boost the economy. Instead, increasing it helps contain inflation and moderate spending.
This careful regulation seeks to maintain a balance between economic growth and price stability, avoiding excessive fluctuations in financial markets and guaranteeing a predictable environment for economic agents.
Open market operations
Open market operations consist of the purchase or sale of financial assets by the central bank. This action modifies the liquidity of the financial system, affecting the amount of money in circulation.
When the central bank buys assets, it injects money into the economy by increasing the money supply and facilitating credit. The sale of assets has the opposite effect, withdrawing liquidity to control inflation and stabilize the system.
These operations are flexible and adapt to changing economic conditions, allowing rapid and precise adjustments to maintain monetary stability without causing sudden imbalances.
Minimum reserve requirements
Minimum reserve requirements require commercial banks to hold a certain percentage of their deposits as a reserve, limiting the amount of money they can lend. This regulates credit expansion.
By modifying this percentage, the central bank controls the banks' ability to create money through credit. Increasing reserves reduces available credit, while decreasing them expands it, influencing the money supply.
This tool ensures that banks maintain adequate levels of liquidity to cover their obligations, protecting the stability of the financial system against risks of insolvency or crisis of confidence.
Objectives of monetary policy
Monetary policy mainly seeks control inflation and maintain price stability, which is crucial for the economy. This generates certainty for consumers and companies.
Furthermore, it aims promote sustained economic growth, creating an appropriate environment for investment, employment and long-term economic development.
Inflation control and price stability
Controlling inflation is essential to avoid the loss of currency value. Stable prices allow purchasing power and confidence in the financial system to be maintained.
Central banks set inflation targets, generally close to 2%, and use tools to adjust the money supply and interest rates, seeking to keep inflation within those limits.
By avoiding excessive fluctuations in prices, a predictable environment is created that favors efficient economic decisions and reduces uncertainty in markets and households.
Promotion of sustained economic growth
Stable economic growth requires monetary policies that support investment and consumption without generating inflationary pressures. Monetary stability is key to this balance.
By controlling the cost of money and facilitating credit, monetary policy boosts productive activity, creating employment and improving general well-being without compromising financial stability.
Financial regulation and supervision
Financial regulation and supervision are key functions of central banks to ensure stability and trust in the economic system. These tasks prevent crises and ensure a solid market.
Through strict regulations and constant surveillance, central banks control the behavior of financial institutions, avoiding systemic risks that could affect the entire economy.
Protection of the stability of the financial system
Central banks monitor banks and institutions to ensure that they operate within safe limits, reducing the likelihood of failures that could destabilize the financial system.
They implement prudential rules and control mechanisms that guarantee the solvency and liquidity of entities, protecting public deposits and maintaining market confidence.
This protection seeks to mitigate negative impacts in financial crises, promoting a healthy environment that favors long-term economic and financial stability.
Facilitation of the interbank payment system
The central bank manages and facilitates the payment system between banks, ensuring that interbank transactions are carried out quickly, securely and efficiently.
This system is essential for the proper functioning of the economy, since it allows the transfer of funds and liquidity necessary for the daily operations of banks and companies.
By keeping this system robust, interruptions in the flow of money that could generate uncertainty or problems in the global financial system are avoided.
