Functions of Central Bank

Topics: Monetary policy, Central bank, Inflation Pages: 6 (1456 words) Published: July 20, 2011
Name: Ogayo Julius Muga
Ref. No: 19201/2010



A central Bank is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country.

The central bank often also oversees the commercial Banking system within its country.

A central Bank is distinguished from a normal commercial bank because it has a monopoly and creating the currency of that nation, which is usually that Nations legal tender.

Central Bank of Kenya is the highest Banking institution in the country and responsible for ensuring the smooth working of banking sector and other financial institutions.

Central Bank differs from commercial banks in that it does not engage in ordinary banking activities e.g. accepting deposits from the general public.

It is owned by the government while commercial banks are owned by shareholders. CBK usually implements certain government policies.


i.To formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices. ii.The Bank fosters the liquidity, solvency and proper functions of a stable market based financial system. iii.Support the economic policy of the government including its objectives for growth and employment. iv.Formulate and implement foreign exchange policy

v.Hold and manage its foreign exchange reserves.
vi.License and supervise authorized dealers
vii.Formulate and implement such policies as best promote the establishment, regulations and supervisions of efficient and effective payment, clearing and settlement systems. viii.Act as banker and advisor to and as fiscal agent of the government. ix.Issue currency notes and coins.


i.Implementing monetary policy
ii.Determining interest rates.
iii.Controlling the Nations entire money supply
iv.The Government banker and the bankers bank.
v.Managing the country’s foreign exchange, gold reserves and also the government stock register. vi.Regulating and supervising the banking industry.
vii.Setting the official interest rate used to manage both inflation and the country’s exchange rate and ensuring that this rate takes effect via a variety of policy mechanism.


Central banks implement a country chosen monetary policy.
This involves establishing what form of currency the country may have. In countries with fiat money, monetary policy may be used as a shorthand form for the interest rates targets and other active measures undertaken by the monetary authority.


i.Price Stability: Unanticipated inflation leads to lender losses. Normal contracts attempt to account for inflation. Efforts are successful if monetary policy is able to maintain steady rate of inflation. ii.High Employment: The movement of workers between jobs is referred to as frictional unemployment. All unemployment beyond frictional unemployment is classified as unintended unemployment. Reduction in this area is the target of macroeconomic policy. iii.Economic Growth: Economic growth is enhanced by investment in technological advances in production. Encouragement of savings supplies funds that can be drawn upon for investment. iv.Interest Rate Stability: Volatile interest and exchange rates generate costs to lenders and borrowers. Unexpected charges that cause damage, making policy formulation difficult. v.Conflict Among Goals: Goals frequently cannot be separated from each other and often conflict. Costs must therefore be carefully weighted before policy implementation. vi.Financial Market Stability.

vii.Foreign Exchange Market Stability.

Many central Banks are ‘Banks’ in the sense that they hold assets (foreign exchange, Gold and other financial assets) and liabilities. Central banks generally earn money by issuing currency notes and selling them to the public for...
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