The central bank of a country's economy acts a monetary and financial pillar. A stable monetary and financial policy is essential for the economic progress.
Central Banks are also vested with certain supervisory powers so that banks and various other financial institutions do not behave irresponsibly. The functions of central banks widely vary from one country to another. Some of the important functions of the central bank of a country are as follows:
- Issuance of bank notes
- Managing the country's foreign exchange and gold reserves
- Deciding on the official interest rate to manage inflation
- Acting as the banker to the Government and the banker's bank
- Regulation and supervision of the banking industry
In most countries the central banks are state-owned and their policies, therefore, are subject to government interference. On the other hand, 'independent central banks' are the ones that function with least government intervention. These banks operate under rules designed to wipe off the possibilities of political interference; examples include the US Federal Reserve, the Reserve Bank of India, the Bank of Japan, the Bank of England, the Deutsche Bundesbank, the Bank of Canada, the Reserve Bank of Australia and the European Central Bank. However, it is improper to say that these 'independent central banks' are entirely beyond the scope of political interference.
Central banks are also subject to more subtle influences from financial interests. During the Financial Crash as 2008 - 2009, it seemed to many that central banks were more focused on saving banks than private citizens, and that is indeed the case. The original model for a central bank, the Bank of England, was set up as a private bank in the 1600's, and the Federal Reserve in the US, has shareholders and boardmembers who are private bankers. To find out more, read our analysis, The Federal Reserve is a Private Bank.