Functions of Central Bank

1440 Words Jul 4th, 2011 6 Pages
Name: Ogayo Julius Muga
Ref. No: 19201/2010



A central Bank is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country.

The central bank often also oversees the commercial Banking system within its country.

A central Bank is distinguished from a normal commercial bank because it has a monopoly and creating the currency of that nation, which is usually that Nations legal tender.

Central Bank of Kenya is the highest Banking institution in the country and responsible for ensuring the smooth working of banking sector and other financial institutions.

Central Bank differs from commercial banks in that it does not engage in ordinary
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These influence the stock and bond markets as well as the mortgage and other interest rates.

The main monetary policy instruments available to central banks are open market operation, bank reserve requirements, interest rates policy, re-lending and re-discount and credit policy.
To enable open market operations, a central bank must hold foreign exchange reserves and official gold reserves.
It will often have some influence over any official or mandated exchange rates.

The most visible and obvious power of many modern central banks is to influence market interest rates.
The actual rate that borrowers and lenders receive on the market will depend on credit risk, maturity and other factors.
A typical central bank has several interest rates or monetary policy tools it can set to influence markets;
a. Marginal Lending Rate- a fixed rate for institutions to borrow money from the central bank
b. Main Refinancing Rate- the publicly visible interest rate the central bank announces. It is also known as minimum bid rate and serves as a bidding floor for refinancing loans.
c. Deposit Rate- the rate parties receive for deposits at the central bank. These rates directly affect the rates in the money market and the market for short term loans.

Through open market operations, a central bank influences the money supply in an economy directly.
Each time it buys securities, exchanging money for the security, it raises the

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