• Central Banks play a vital role in?maintaining stability?in the financial system. Additionally, the?policy tools?at their disposal help to meet Government economic objectives & create economic growth

Central Banks play four important roles in the?economy

1. Implementation of?monetary policy:??This was covered more fully in?Sub-topic 2.6.2
2. Banker to the government:?The Government sets the?annual budget?but it is the Central Bank that manages the?tax receipts & payments.?In 2022 there were 5.7 million public sector workers in the UK who had to be paid each month
3. Banker to the banks – lender of last resort:?Commercial banks are able to borrow from the Central Bank if they run into short-term liquidity issues. Without this help, they might go bankrupt leading to instability in the financial system - & a potential loss of savings for many households
4. Regulation of the banking industry:?the high level of?asymmetric information?in financial markets requires that commercial banks are regulated in order to protect consumers. One of the key regulatory actions to manage the money supply & promote stability in the financial system is the implementation of?required reserve ratios. Raising the ratio decreases the money supply in the economy - and vice versa