The central bank is the key element of a country’s financial system. It controls the money supply, interest rates, and the national currency. In addition, the central bank generally oversees its country’s commercial banking system.
Central banks have several important functions, of which the main one is to maintain price stability by controlling inflation. It is up to the central bank to promote the economic health of a country.
These agencies impact the market – “central bank intervention” is a well-known expression. The bank enters the foreign exchange market to buy or sell currencies in order to influence exchange rates. Another way of intervening is to provide necessary information in the market, which is called verbal intervention.
To have a good understanding of the policy of any central bank, you need to know your main goals, basic tasks, schedule, and agenda for your meetings. In addition, you need to be able to predict the possible impact of the measures you take on the future value of the affected currency.
The Federal Reserve (Fed) is the central bank of the United States, including 12 regional located in major cities across the country. They gather economic information to enable the Fed to choose the right monetary policy. Monetary policy decisions at the Fed are taken by the Federal Open Market Committee (FOMC), consisting of 7 members of the Governor’s Council and 5 presidents of the Reserve Bank.
FOMC meetings represent one of the most anticipated events and have a strong impact on the foreign exchange market. The Fed announces the interest rate (federal funds rate), offers economic insights that have influenced its decision on the rate and provides some clues about future changes in the statements.
Meetings accompanied by press conferences (usually in March, June, September and December) are the most important, as they are the same as the rate changes.
It is worth adding that, 3 weeks after each meeting, the central bank releases its minutes. This document contains information regarding the previous decision and may disclose the Fed’s intentions regarding future monetary policy.
In deciding its policy, the Federal Reserve takes into account economic indicators such as GDP growth, main CPI, main PCE price index, average hourly wages and non-farm payrolls.
Traders try to predict the Fed’s stock and its expectations cause the US dollar to rise and fall.
The European Central Bank (ECB) is the central bank of the 19 European Union countries that adopted the common currency – the euro – in 2002.
Its main tasks are to define and implement monetary policy for the euro area; take charge of the national banks of the members of the euro zone; operate the exchange; promote the stable functioning of payment systems and safeguard the currencies held by the euro area.
The ECB takes monetary policy decisions every 6 weeks. These decisions are followed by press conferences and have a major impact on the dynamics of the euro, while the minutes of ECB meetings do not usually affect the market very much.
The Bank of England (BoE) is the central bank of the United Kingdom whose history begins in the year 1694. The main tasks of the BoE do not differ from those of other central banks. It supports British economic growth, maintains inflation and sets interest rates.
The Bank’s monetary policy committee (MPC) meets once a month to set monetary policy. The central bank releases the minutes of the meetings shortly after their completion, which are often accompanied by press briefings with the BoE governor.
Once a quarter, the Bank releases its inflation report, containing its projections for inflation and GDP.
In addition, the central bank publishes information about the money printing program (the total amount of money the BoE will create and use to buy assets in the open market).
The main objective of the Bank of Japan (BOJ) is basically the same as those of the other organs: “to carry out exchange and monetary control to provide price stability.”
The Bank of Canada (BOC) exists “to regulate credit and currency in the best interests of the nation’s economic life.” One of the aspects of BOC’s work is its business perspective: about 100 companies with the largest shares of GDP assess business conditions. This research gives good clues about monetary policy.
The main goal of the Reserve Bank of Australia (RBA) is “to contribute to the stability of the currency, full employment and the economic prosperity and well-being of the Australian people.” The central bank serves the government and its agencies, as well as central banks and institutions abroad. In addition, it maintains the reserves of gold and foreign currency of Australia.
The Reserve Bank of New Zealand (RBNZ) “manages monetary policy to maintain price stability, promotes the maintenance of a sound and efficient financial system, and provides New Zealand notes and coins.”
Note: it is worth mentioning that speeches by members of central banks also influence the economy, since there are no people more tied to monetary policy than these. The words of the directors of the central banks are what most affect the markets.
What to follow in the economic calendar: