Lecture notes Unit 4 - Making markets work

4.5.3 The role of the central bank

• Central bank manages the currency and money supply for an economy

Implementation of monetary policy

• Central bank acts to influence the manipulation of interest rates
• In UK MPC alters interest rates and controls supply of money
• Bank controls base rate which ultimately controls interest rates

Banker to the government

• Provides services to central government
• It maintains and operates deposit accounts of the government
• Central bank also manages public debt and advice government

Lender of last resort

• BOE is this
• Only used if there is no other way of obtaining money
• If institution risky or close to collapse the bank may lend them money
• It can protect individuals who deposit funds in bank
• Banks avoid this as it suggests they are experiencing financial disaster

Role in regulation of banking industry

• Governments might regulate banks with regulation and guidelines
• Helps ensure behavior in banks is clear
• Banks have an influence on how economy is run
• PRA & FCA regulate financial firms to ensure they are being honest to customers
• FCA also promote competition
• PRA promotes safety and stability of banks