Central banks play a critical role in the functioning of modern economies. While they often operate behind the scenes, their decisions influence everything from inflation and interest rates to employment levels and the stability of the financial system. Understanding how central banks work—and why their actions matter—can give individuals, investors, and businesses a clearer picture of the economic landscape.
What is a Central Bank?
A central bank is a national institution responsible for managing a country’s monetary policy and financial stability. It operates independently of political influence in most countries, though it often works in coordination with government fiscal policy.
Examples include:
Federal Reserve (U.S.)
European Central Bank (ECB)
Bank of England (UK)
Bank of Japan (Japan)
Central Bank of Myanmar (CBM)
Key Functions of Central Banks
1. Controlling Inflation and Price Stability
One of the central bank’s primary roles is to maintain price stability. This means keeping inflation (or deflation) at a manageable rate.
If inflation is too high: The central bank may raise interest rates to cool down spending.
If inflation is too low or negative: It may lower interest rates or inject money into the economy to stimulate growth.
Stable prices promote consumer and investor confidence, which supports long-term economic growth.
2. Setting Interest Rates
Central banks influence the benchmark interest rate, which affects:
