The central bank can be described as the "last Creditor", which means that the central bank is responsible for providing funds for the economic movement of a country when commercial banks are unable to cover it. In other words, the central bank prevents the banking system in a country from collapsing. However, the central bank's main goal is to ensure the security / stability of a country's currency values by controlling inflationary movements. The central bank also acts as the authority that regulates monetary policy in a country as well as the sole provider of money. The central bank is an independent institution, separate from the government's fiscal policy and unaffected by political activity in any local area.
In the present, the central bank is the ownership of the government of a state but is separate from the power of the finance minister, although both work together to bring about social welfare. Although the central bank is often referred to as the "government's bank" because the central bank handles the purchase and sale of state debt and other instruments, political policy will not affect the operations or measures taken by the central bank. Of course, the characteristics of the relationship between central banks and governments vary across countries and continue to evolve over time.
Influence of the Central Bank in Economic activities
In general, the central bank has 2 types of functions. The first is the macroeconomic function, in which the central bank regulates inflation and price stability. And the second is the function of microeconomics, where the central bank acts as a creditor.
Macro economics
Because the central bank is responsible for maintaining price stability, the central bank must regulate the inflation rate in a country by controlling the amount of money circulating in the community through monetary policy. The central bank may engage in purchases of state assets and / or government securities that will increase the level of currency liquidity or absorb additional funds, which directly affect the inflation rate. To increase the amount of money in circulation and reduce the interest rate charged to debtors, the central bank may purchase state securities and other securities issued by the state. The purchase will make the inflation rate increase. While when the central bank feels the need to reduce the amount of money in circulation to reduce inflation, the central bank will sell state debt to the market, which will then increase interest rate and make people reluctant to borrow money. Open Market Operation (OMO) is a crucial step used by the central bank to control inflation, the amount of money in circulation and price stability.
Microeconomics
A commercial bank, in lending funds to the debtor / community, uses a first come first serve system. When the commercial bank does not have sufficient funds to meet the debtor's demand, the commercial bank will go to the central bank to borrow some additional funds. This will create a fairly stable system whereby the central bank should not be a golden child of a particular commercial bank. With the system, many central banks ask commercial banks to deposit some money as a deposit based on predetermined ratio. By making these policies, funds deposited by commercial banks also serve as a means to control the amount of money circulating in the community.
The interest rate on loans borrowed by commercial banks and lending institutions from the central bank is called a discount rate (fixed by the central bank and refers to / supports the interest rate on loans from the central bank). And in order for OMO to run more efficiently, the discount rate will keep commercial banks from borrowing excess money from the central bank. Because by doing so (excessive borrowing), commercial banks will circulate too much money into society and disrupt the implementation of monetary policy of the central bank.
Bottom line
Thus, in fundamental analysis, the central bank is the most important indicator in position analysis and decision making; Because of the enormous influence that the central bank has to regulate the amount of money in circulation from a country. If the money in circulation is too much, then the value of the currency will decrease and inflation will increase, so the purchasing capacity of consumers decreases; And vice versa. But if the money supply is too small, the interest rate when lending to the bank will increase, so people are reluctant to borrow money, and then will have an impact on the economic activity that slows down due to lack of capital.
In the present, the central bank is the ownership of the government of a state but is separate from the power of the finance minister, although both work together to bring about social welfare. Although the central bank is often referred to as the "government's bank" because the central bank handles the purchase and sale of state debt and other instruments, political policy will not affect the operations or measures taken by the central bank. Of course, the characteristics of the relationship between central banks and governments vary across countries and continue to evolve over time.
Influence of the Central Bank in Economic activities
In general, the central bank has 2 types of functions. The first is the macroeconomic function, in which the central bank regulates inflation and price stability. And the second is the function of microeconomics, where the central bank acts as a creditor.
Macro economics
Because the central bank is responsible for maintaining price stability, the central bank must regulate the inflation rate in a country by controlling the amount of money circulating in the community through monetary policy. The central bank may engage in purchases of state assets and / or government securities that will increase the level of currency liquidity or absorb additional funds, which directly affect the inflation rate. To increase the amount of money in circulation and reduce the interest rate charged to debtors, the central bank may purchase state securities and other securities issued by the state. The purchase will make the inflation rate increase. While when the central bank feels the need to reduce the amount of money in circulation to reduce inflation, the central bank will sell state debt to the market, which will then increase interest rate and make people reluctant to borrow money. Open Market Operation (OMO) is a crucial step used by the central bank to control inflation, the amount of money in circulation and price stability.
Microeconomics
A commercial bank, in lending funds to the debtor / community, uses a first come first serve system. When the commercial bank does not have sufficient funds to meet the debtor's demand, the commercial bank will go to the central bank to borrow some additional funds. This will create a fairly stable system whereby the central bank should not be a golden child of a particular commercial bank. With the system, many central banks ask commercial banks to deposit some money as a deposit based on predetermined ratio. By making these policies, funds deposited by commercial banks also serve as a means to control the amount of money circulating in the community.
The interest rate on loans borrowed by commercial banks and lending institutions from the central bank is called a discount rate (fixed by the central bank and refers to / supports the interest rate on loans from the central bank). And in order for OMO to run more efficiently, the discount rate will keep commercial banks from borrowing excess money from the central bank. Because by doing so (excessive borrowing), commercial banks will circulate too much money into society and disrupt the implementation of monetary policy of the central bank.
Bottom line
Thus, in fundamental analysis, the central bank is the most important indicator in position analysis and decision making; Because of the enormous influence that the central bank has to regulate the amount of money in circulation from a country. If the money in circulation is too much, then the value of the currency will decrease and inflation will increase, so the purchasing capacity of consumers decreases; And vice versa. But if the money supply is too small, the interest rate when lending to the bank will increase, so people are reluctant to borrow money, and then will have an impact on the economic activity that slows down due to lack of capital.
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