Essential

Central Bank

A national institution that manages monetary policy, interest rates, currency supply, and financial system stability.

Definition

A central bank is the primary institution responsible for a country's monetary policy. It controls the money supply, sets benchmark interest rates, acts as lender of last resort to commercial banks, and manages foreign exchange reserves. Central bank decisions are among the most powerful drivers of currency values in forex markets because interest rate changes directly affect capital flows between countries.

How It Works

Sets benchmark interest rates that influence borrowing costs across the economy
Controls money supply through open market operations and reserve requirements
Acts as lender of last resort during financial crises
Manages foreign exchange reserves and may intervene in currency markets
Major central banks: Federal Reserve (US), ECB (Europe), BOJ (Japan), BOE (UK), SNB (Switzerland)

Trading Tips

Central bank meetings are the highest-impact events on the forex calendar

Forward guidance (what the bank says about future policy) often moves markets more than the rate decision itself

Interest rate differentials between central banks drive carry trades and long-term currency trends

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