Central bank

A central bank is a country's primary financial authority. It issues the national currency, manages the government's accounts, and supervises the banking system. Unlike a commercial bank, it does not exist to make profit or serve individual customers. It is the bank that other banks use, and the institution that sets the rules they operate under.

A central bank's decisions reach into every household's finances. When it raises interest ratesTermInterest rate×سعر الفائدةThe percentage of principal charged by a lender or paid by a saver, usually stated as an annual rate.Open the term, borrowing becomes more expensive and saving becomes more rewarding. When it lowers them, the reverse happens. These moves ripple through mortgagesTermMortgage×الرهن العقاريA loan secured by property, where the lender holds a claim on the house until the debt is repaid.Open the term, car loans, credit cardsTermCredit card×بطاقة ائتمانA card that lets you borrow money to pay for purchases now and repay the bank later, usually with interest.Open the term and deposit accounts. The central bank also decides how much money circulates in the economy, which affects inflationTermInflation×التضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term and the purchasing power of the cash in your pocket. It is also the backstop when banks fail: if a bank collapses, the central bank can inject liquidityTermLiquidity×السيولةHow quickly and easily an asset can be converted to cash without losing value or paying a large fee.Open the term to prevent a cascade of failures that would wipe out deposits. That protection is why you can hold money in a bank without the same risk you would carry if you held it yourself.

• A central bank's primary tools are interest rates and the money supply. Changes to either take months to show up in the real economy, so policyTermCar insurance×تأمين السياراتA contract that covers the cost of damage to your vehicle or injury to others, depending on the type of policy you hold.Open the term is set on forecasts, not current conditions.
• Central banks are independent by design in most countries, meaning the government cannot simply order them to print money or cut rates. That separation exists to prevent politicians from inflating the currency before an election.
• The central bank is not the same as the finance ministry. The ministry collects taxes and spends money; the central bank controls the currency and the banking system.
• A central bank can only control so much. It cannot force banks to lend or people to borrow, and it cannot override global market forces or the price of oil.