4 cen­tral banks dom­i­nat­ing world econ­omy

The Pak Banker - - COMPANIES/BOSS -

Cen­tral banks play an in­te­gral role in to­day's mar­ket economies by main­tain­ing the sta­bil­ity and cred­i­bil­ity of the na­tional cur­ren­cies used in those economies.

While a sta­ble cur­rency is im­por­tant for achiev­ing price sta­bil­ity con­ducive to sta­ble eco­nomic growth within the do­mes­tic econ­omy, it's also im­por­tant in achiev­ing sta­ble ex­change rates with com­mon in­ter­na­tional trad­ing part­ners. Volatile ex­change rates with com­mon trad­ing part­ners mean un­sta­ble prices for im­ports and ex­ports cre­at­ing a vac­il­lat­ing eco­nomic en­vi­ron­ment in this in­creas­ingly glob­al­ized econ­omy.

As the US dol­lar, euro, Ja­panese yen, and Bri­tish pound are the four most com­monly used cur­ren­cies in global pay­ments, the mon­e­tary poli­cies of their re­spec­tive is­suers (i.e., cen­tral banks) are most im­por­tant for main­tain­ing in­ter­na­tional eco­nomic sta­bil­ity.

Be­low are the "Big Four" cen­tral banks and their re­spec­tive stances on mon­e­tary pol­icy. The Fed­eral Open Mar­ket Com­mit­tee ( FOMC) is re­spon­si­ble for de­vis­ing U.S. mon­e­tary pol­icy, which, ac­cord­ing to Fed­eral Re­serve doc­u­ments, is man­dated to be "pro­mot­ing max­i­mum em­ploy­ment, sta­ble prices, and mod­er­ate long-term in­ter­est rates." The 12 mem­bers of the FOMC meet a min­i­mum of eight times a year in or­der to de­ter­mine the most ap­pro­pri­ate level for the fed­eral funds rate, the overnight in­ter­est rate at which de­pos­i­tory in­sti­tu­tions lend to each other.

Through the use of a set of mon­e­tary tools, the FOMC can af­fect the fed­eral funds rate, which then af­fects other in­ter­est rates and, con­se­quently, other eco­nomic vari­ables, in­clud­ing price level and un­em­ploy­ment. Cur­rently, the FOMC sees a 2% in­fla­tion rate as the most con­sis­tent with its statu­tory man­date and long-run nor­mal rate of un­em­ploy­ment be­tween the range of 5.2% and 5.5%. The Euro­pean Cen­tral Bank (ECB) is re­spon­si­ble for the mon­e­tary pol­icy of the 19 Euro­pean Union coun­tries that use the euro. Com­prised of six ex­ec­u­tive board mem­bers and the gover­nors of the 19 cen­tral banks of the euro-area na­tions, its pro­claimed man­date is main­tain­ing price sta­bil­ity and safe­guard­ing the euro's value.

Meet­ing twice a month, this gov­ern­ing coun­cil an­a­lyzes and as­sesses re­cent eco­nomic de­vel­op­ments to de­ter­mine the ap­pro­pri­ate level for key in­ter­est rates. The ap­pro­pri­ate level of these in­ter­est rates is cru­cial for main­tain­ing the ECB's mis­sion of price sta­bil­ity and main­te­nance of the euro's pur­chas­ing power, which is cur­rently seen as be­ing achieved at a medium- term in­fla­tion rate be­low - but close to - 2%.

The mon­e­tary pol­icy com­mit­tee (MPC) of the Bank of Eng­land (BoE) is re­spon­si­ble for the na­tion's mon­e­tary pol­icy, cur­rently rec­og­nized as the main­te­nance of price sta­bil­ity and con­fi­dence in the cur­rency. Tra­di­tion­ally, the BoE achieved its mon­e­tary ob­jec­tives through the in­ter­est rate, but in March 2009, it claimed it would be­gin di­rectly in­ject­ing money into the econ­omy through quan­ti­ta­tive eas­ing or the di­rect pur­chas­ing of fi­nan­cial as­sets.

The nine-mem­ber com­mit­tee meets monthly to as­sess the eco­nomic cli­mate and vote on the ap­pro­pri­ate level for Bank Rate - the in­ter­est rate the BoE pays on re­serve bal­ances - as well as on any quan­ti­ta­tive eas­ing mea­sures to be taken. Through these tools, the MPC looks to main­tain price sta­bil­ity, cur­rently de­fined as achieved at an in­fla­tion rate of 2%.Bri­tish pound us­age: GBP used for 7.92% of global pay­ments as of De­cem­ber 2014.

Ja­pan's mon­e­tary pol­icy is de­cided by the pol­icy board whose stated man­date is the main­te­nance of price sta­bil­ity, which con­sti­tutes "the foun­da­tion for the na­tion's eco­nomic ac­tiv­ity." Money mar­ket oper­a­tions are the pri­mary tool used by the Bank of Ja­pan (BoJ). They're how the BOJ con­trols the amount of funds avail­able in the money mar­ket, which con­se­quently af­fects in­ter­est rates within the econ­omy.

Meet­ing once or twice a month at Mon­e­tary Pol­icy Meet­ings (MPMs), the board dis­cusses the cur­rent eco­nomic and fi­nan­cial cli­mate and then de­ter­mines an ap­pro­pri­ate guide­line for its money mar­ket oper­a­tions. The board's in­fla­tion tar­get (at which it sees the achieve­ment of price sta­bil­ity) is cur­rently set at 2%. Ja­panese yen us­age: JPY used for 2.69% of global pay­ments as of De­cem­ber 2014. (See also How Cen­tral Banks Con­trol The Sup­ply of Money.)

Un­sta­ble prices make con­sump­tion and in­vest­ment de­ci­sions by in­di­vid­u­als and firms ex­tremely dif­fi­cult be­cause many of these de­ci­sions are based on ex­pec­ta­tions about fu­ture prices. No won­der one of the pri­mary mon­e­tary pol­icy ob­jec­tives com­mon to the Big Four cen­tral banks is price sta­bil­ity. One of the es­sen­tial char­ac­ter­is­tics of money is that it acts as a sta­ble store of value; any in­sta­bil­ity in this store-of­value qual­ity of the above cur­ren­cies could lead to its de­creas­ing use and, con­se­quently, de­clin­ing in­flu­ence in the global econ­omy. Want to learn How to In­vest In Com­modi­ties? In­vesto­pe­dia's FREE Com­modi­ties Trad­ing news­let­ter gives you the in­sights you need to profit from nat­u­ral re­sources. Click here to be­gin track­ing the com­mod­ity mar­ket like an ex­pert to­day.

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