Central bank

A central bank is the bank for the government and for commercial banks. It issues banknotes and the reserves that banks hold with it, and it sets the policy interest rate. Most major central banks, including the Bank of England, the European Central Bank and the US Federal Reserve, are operationally independent: governments or treaties set their objectives, and the bank decides how to achieve them. The central aim is usually price stability, often defined as an inflation target, sometimes alongside other goals, such as maximum employment in the case of the Federal Reserve.

Central banks also act as lender of last resort, providing emergency funding to sound banks that face a sudden loss of deposits, and many supervise banks directly. Their main tools are the policy rate, bond buying and selling through quantitative easing and tightening, and guidance about future policy. For investors, central banks are among the most important influences on markets, because their decisions move interest rates, bond yields, currencies and the relative appeal of shares and cash. Their independence is meant to stop governments using money creation for short-term political ends.