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101 Concepts for the Level I Exam

Concept 30: Roles and Objectives of Central Banks

Roles of central bank

  • Supply currency: Central banks have the sole authority to supply money.
  • Banker to government and other banks: Central banks provide banking services to the government and other banks in the country.
  • Regulate risk and supervise payment system: Central banks regulate the risk standards in the banking systems and monitor the payment system to ensure smooth transactions.
  • Lender of last resort: Central banks can print money when the need arises.
  • Repository of gold and foreign exchange reserves: Holds a country’s gold and foreign exchange reserves.
  • Conducts monetary policy: Central bank controls the money supply in an economy.

Objectives of central bank

  • Control inflation (primary objective): A controlled inflation level promotes price stability which is conducive to a stable economic development.
  • Exchange rate stability: Countries that have their domestic currency pegged to another currency must make an effort to match its inflation rate with that country.
  • Full employment: Take measures that move the economy to its full potential level of employment.
  • Sustainable positive economic growth.
  • Moderate long-term interest rates.

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