A central bank is a financial institution with special authority to issue government-backed currency. It is often responsible for formulating monetary policy and regulating member banks. Examples of central banks include the Bank of England in the UK and the Federal Reserve in the US.
Central bank responsibilities
One key function of central banks is to control money supply. They can do this by setting interest rates on loans and bonds. Typically, they will raise bank interest rates to slow growth and avoid inflation, and lower them to promote industrial activity and consumer spending. A central bank’s regulation duties usually include guidance over how member banks can lend to customers, and how much cash they must keep in reserve. A central bank can also act as an emergency lender to commercial banks and other institutions in times of crisis.