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Interest rate determination and the role of a central bank

Syllabus: Describe the role of central banks as regulators of commercial banks and bankers to governments.

Central Banks are often given that name along with the country they represent as in Banco Central do Brasil: Other central banks are The Federal Reserve (USA), The Bank of England (UK).

The mission statement of the Banco Central do Brasil is: To ensure the stability of the currency`s purchasing power and a solid and efficient financial system.

Often, central banks are arms of government but in some countries like UK and New Zealand they are completely independent. In the USA the Fed is said to be independent of government but much of their operations are monitored by the government (Congressional Committee) and the Governor is often a political appointment.

The responsibility for monetary policy can rest with the government and/or the central bank.

The Bank is then given an inflation target and they set interest rates to keep to that target.

In the case of the Eurozone (all the EU countries who use the euro - the single European currency), this responsibility for monetary policy rests with the European Central Bank, which sets a single interest rate for the whole Eurozone.

Syllabus: Explain that central banks are usually made responsible for interest rates and exchange rates in order to achieve macroeconomic objectives.

Central Banks are tasked with regulating commercial banks (they make sure commercial banks behave withing guidelines)

They act as the government´s bank

They are responsible for issuing currency along with carrying out monetary policy, especially in the setting of interest rates: In Brazil the authority for setting the Base Interest Rate (CELIC in Brazil) is the COPOM - the base interest rate is the interest that influences all other interest rates charged by financial organisations such as commercial banks.


Case study - The role of a Central Bank


Now visit the website of the Norges Bank at

  1. Identify who owns Norges Bank.
  2. Describe the main functions and responsibilities of the Norges bank and, for each function, briefly explain how Norges Bank carries out this function.
  3. Use the internet to identify who is responsible for monetary policy (setting interest rates) in your country. Is it the government or the central bank? If it is the central bank - is it independent? Find figures for how interest rates have changed in recent years.