What is the role of a central bank?

The role of a central bank is multifaceted and crucial for the economic stability of a country. A central bank is primarily responsible for managing a nation’s currency, money supply, and interest rates. One of its key functions is to implement monetary policy aimed at controlling inflation and stabilizing the currency. By adjusting interest rates, the central bank can influence economic activity, stimulating growth or cooling down an overheated economy. In addition to monetary policy, a central bank acts as a regulator of the banking system. It ensures the safety and soundness of financial institutions, fostering a stable banking environment that protects depositors and maintains public confidence in the financial system. Central banks also serve as a lender of last resort, providing liquidity to banks in times of financial distress to prevent systemic failures. Furthermore, central banks manage foreign exchange and gold reserves and may oversee payment systems to facilitate smooth transactions in the economy. They often play a significant role in financial stability by monitoring the economy and acting preemptively to mitigate risks. Overall, the central bank serves as an essential pillar of a nation's economic framework, maintaining balance between growth and stability.