A Central Bank May Be Defined As A National Bank That Provides

1913 WordsMar 24, 20178 Pages
A central bank may be defined as a national bank that provides financial and banking services for the country’s government. A central bank is different to a commercial bank such as Barclays or RBS whose main objective is profit maximisation. There are many central banks across the world, each one providing services for their own country. For example, the Bank of England is the central bank of England which was established in 1694, the Federal Reserve is the central bank of the USA and that was established in 1914. Although they all differ in terms of which government they provide a service for, their roles as central banks remain quite similar. The two primary goals of most if not all central banks are to achieve monetary stability and…show more content…
The way this works is that commercial banks assume that not all their customers would withdraw their deposits simultaneously therefore they lend out large deposits from their overall reserve with rates in which individuals or businesses would have to pay back. Central banks on the other hand aim to achieve their objectives using two distinct tools, each one being used to achieve one of the two objectives. For example, the monetary policy is used to maintain price stability. Another difference is that commercial banks do not have the authority or power to apply any policies in which they can affect the economy as a whole. Rather, they act and make their business decisions based on the policies given out by the central banks. The central bank is the only banking agency that is given authority by the government to alter interest rates and money supply which affects the way the economy would work. As previously mentioned, the two main objectives of a central bank are to achieve monetary and financial stability. Monetary stability refers to keeping the level of inflation in the economy low. Inflation can be defined as the general rise in prices of goods and services in an economy over a period of time. The inflation target of the Bank of England is to keep it below 2%. The inflation rate has been below 2% since early 2014 but prior to this, the inflation

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