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Central Banks and Their Functions

Central banks, such as the South African Reserve Bank, have unique powers including setting interest rates, issuing currency, and managing the national payment system, which distinguishes them from commercial banks. Their main functions involve regulating monetary policy, overseeing banks, providing emergency funding, managing currency, and conducting economic analysis to promote stability and growth. Central banks operate independently from the government to ensure decisions benefit the economy as a whole.

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2 views

Central Banks and Their Functions

Central banks, such as the South African Reserve Bank, have unique powers including setting interest rates, issuing currency, and managing the national payment system, which distinguishes them from commercial banks. Their main functions involve regulating monetary policy, overseeing banks, providing emergency funding, managing currency, and conducting economic analysis to promote stability and growth. Central banks operate independently from the government to ensure decisions benefit the economy as a whole.

Uploaded by

zwangaasa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Central Banks and their functions

A central bank has unique powers that differentiate it from other commercial banks.
Some of these powers, which influence the public in an immediate and direct way,
include the setting of interest rates, the issuance of currency and the management of
the national payment system. No other bank in the country has such powers, which
shows the special place of the central bank in the economy.

The South African Reserve Bank’s role has become entrenched in the domestic
economy since its establishment in 1921. The central bank works closely with the
government, but takes its decisions independently from the government. This
independence ensures that decisions are taken in the best interest of the country as a
whole and its entire people, rather than in support of the government. The South African
Reserve Bank is also the banker of the central government, which contributes to the
special relationship between the central bank and the government.

Functions

The main functions of a central bank are to regulate monetary policy, oversee banks
and financial institutions, provide emergency funding to banks, issue and manage the
national currency, conduct economic analysis and research, manage payment systems
for smooth transactions, promote economic growth and stability, etc.

 Regulating monetary policy

Central banks use monetary policy to manage economic fluctuations and achieve price
stability, which means that inflation is low and stable. Central banks in many advanced
economies set explicit inflation targets. Central banks conduct monetary policy by
adjusting the supply of money, usually through buying or selling securities in the open
market. Open market operations affect short-term interest rates, which in turn influence
longer-term rates and economic activity. When central banks lower interest rates,
monetary policy is easing. When they raise interest rates, monetary policy is tightening.

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 Banks and financial institutions oversight

Central banks supervise the banking system by controlling the activities of the banks
(licensing, regulation, definition of the scope of banking activity, and so forth); by
monitoring solvency (such as setting and supervising prudential ratios); and by
monitoring liquidity (regulation of the money market so as to ensure it remains
sufficiently liquid). It is in this third area that banking supervision impinges on monetary
policy.

 Providing emergency funding to banks


Banks request emergency liquidity funding (ELF) from a central bank in response to a
run on deposits. On an accounting basis, a run is a symptom of illiquidity, which means
in the banking context that the long-term assets of the bank, generally loans, are not
able to be liquidated fast enough to pay the bank’s short-term liabilities, mainly
deposits. As a result, the bank quickly runs out of cash, and, assuming that other
banks will not lend, must turn to the central bank.

 Issuing and managing the national currency

To ensure a nation's economy remains healthy, its central bank regulates the amount
of money in circulation. Influencing interest rates, printing money, and setting bank
reserve requirements are all tools central banks use to control the money supply.

 Conducting economic analysis and research

The Central Bank aims to ensure that its economic advice is forward looking and
independent and that statistics are robust and relevant. To achieve this, the Central
Bank undertakes data collection, statistical analysis, economic analysis and research
designed to inform economic policy making. The analytical and statistical outputs are
disseminated through various publications, seminars and through ongoing interactions
with government departments, academia and commentators.

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Central banks need to have sound systems for acquiring, sharing, and analyzing
economic and financial data so that they can respond quickly to unforeseen
developments and steer monetary policy to achieve its objectives

Students should also elaborate on these:

Functions of central Bank

Currency regulator or bank of issue.

Bank to the government.

Custodian of Cash reserves.

Custodian of International currency.

Lender of last resort.

Clearing house for transfer and settlement.

Controller of credit.

Protecting depositors’ interests.

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