Central Bank

Examples include the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Reserve Bank of India. Most countries have one.

Central banks have several key roles. They conduct monetary policy, usually by setting a key interest rate, to keep inflation low and stable and to support economic activity. They issue banknotes. They act as the bank for commercial banks, holding their reserves and lending to them when needed. In a financial crisis, they can act as a lender of last resort, providing emergency funding to stop panic spreading through the banking system. Many also supervise banks to ensure they are safe.

For example, if inflation is running well above target, a central bank may raise its policy rate. This makes borrowing more expensive throughout the economy, slows spending and helps bring inflation down.

Many central banks are independent from day-to-day political control. The idea is that independence allows them to make difficult decisions, such as raising interest rates, based on long-term economic goals rather than short-term political pressures.