What is a central bank?
The deepest tap in money.
Behind the banks that lend to us sits one more bank. What the world’s central banks do, and how they differ from country to country, traced through the image of a tap.
In 30 seconds
- A central bank issues banknotes, keeps money moving between banks and sets the level of interest rates. It is the bankers’ bank.
- What it aims for differs by country. The euro area targets 2% inflation over the medium term, India 4% (within a band of 2 points either way) and Brazil 3% (within 1.5 points either way).
- The oldest central bank is Sweden’s Riksbank, founded in 1668. Today 63 central banks are members of the Bank for International Settlements (BIS).
Banks have a bank too.
Just as we keep money at a bank, banks keep money at the central bank, and borrow from it when they are short.
Central banks and monetary authorities that are members of the BIS
Together, the member economies account for about 95% of world GDP (BIS).
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The bankers’ bank
A central bank’s duties differ a little from country to country. Most, however, share three: issuing banknotes, supporting payments between banks and setting the level of interest rates.
The central banks’ central bank
The Bank for International Settlements in Basel, Switzerland, counts 63 central banks and monetary authorities as members. The central banks of Kuwait, Morocco and Vietnam joined in 2020, and together the members account for about 95% of world GDP.[1]
The handle on the tap is the interest rate.
A central bank’s most-used tool is its policy rate. Raising or lowering the price of borrowing changes how much money flows.
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In the euro area
The European Central Bank describes its policy rates as its primary instrument. When rates are hard to lower further, it can also use longer-term lending, purchases of bonds and other assets, negative rates and guidance about the future.[2]
Where the image stops working
There may be one tap, but the plumbing differs by country. The same move in rates reaches everyday life differently depending on how mortgages work and how much people keep in bank deposits.
The gauge reads differently in every country.
The same words, “price stability”, can mean a different target and a different way of setting it.
The euro area’s inflation target (medium term)
A “symmetric” target: overshooting and undershooting are equally unwelcome.
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Three economies
The ECB considers that price stability is best maintained by aiming for 2% inflation over the medium term, and treats deviations above and below as equally undesirable.[2] In India the government sets the inflation target at 4% with a tolerance band of 2–6%, extended for a further five years in March 2026.[4] In Brazil the National Monetary Council targets 3% with a band of 1.5 points either way.[5]
Countries that also target jobs
In the United States, the law directs the Federal Reserve to pursue maximum employment, stable prices and moderate long-term interest rates. The dual goals of employment and prices were written in by a 1977 amendment.[3]
The oldest tap dates from 1668.
The world’s oldest central bank began as a bank created by the Swedish parliament.
The year Sweden’s Riksbank was founded
Its first name was the Bank of the Estates of the Realm; the present name came in 1867.
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After a failed bank
In 1668 the Swedish parliament decided to build a new bank on the ruins of a private bank that had collapsed. It became the Riksbank, regarded as the oldest central bank in the world.[6]
A scale for reading what comes next.
A scale for reading central bank news for yourself.
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Target and today’s prices
The gap between each central bank’s target and the latest inflation figure. The wider the gap, the stronger the reason to move rates.[2][4][5]
Rate-setting days
Many central banks publish the dates of their rate-setting meetings in advance.
The words in the statement
What the statement after each meeting says about the future. The ECB counts forward guidance among its tools.[2]
This is not investment advice
This edition explains how central banks work. It does not recommend buying or selling any currency or product.
Next question
NEXT QUESTIONA world that will not give up its 150-odd wallets.NEXT QUESTIONA price tag for the night you carry over.See the Field Notes shelf →What this edition cannot tell you
- The detailed differences in duties between central banks. This edition covers only the shared roles.
- A list of the inflation targets of every central bank. Three economies serve as examples.