Central banks use interest rates to shape up their monetary policy. An interest rate is a fundamental data used by news traders to evaluate the economic conditions of a country. Knowing what makes central banks tick gives you the upper hand to know their next moves, as well as where a given currency pair is headed. (See 4 Forex News Events to Watch)
In this article, we discuss each major central bank’s structure and duties.
The Major Central Banks
U.S. Federal Reserve (The Fed)
The Federal Reserve, popularly known as the Fed, is the world’s most influential central bank. Given that the U.S. dollar appears on almost 90% of Forex transactions, the Fed’s interest rate decision has a substantial effect on the value of many currencies.
The Fed’s Federal Open Market Committee (FOMC), the group that decides on interest rates, meets 8 times a year and is consist of seven governors of the Federal Reserve Board plus five presidents of the 12 district reserve banks.
European Central Bank (ECB)
Consists of 6 council members, the European Central Bank or ECB decides on changes to monetary policy. The ECB usually makes comments to the press whenever it decides to make a change in interest rates.
Bank of England (BoE)
The BoE’s main responsibility is to maintain monetary and financial stability. Composed of 9 members, the BoE’s committee imposes an inflation target of 2% to keep prices stable, as well as to maintain confidence in the currency.
Bank of Japan (BoJ)
Meeting once or twice a month, the Bank of Japan committee has a BoJ governor, two deputy governors, and six other members. Japan is an export-dependent country, so the BoJ controls its monetary policy to prevent an excessively strong yen.
Swiss National Bank (SNB)
The Swiss National Bank has a three-person committee that decides on interest rates. Just like Japan, Switzerland heavily counts on its exports, thus, it prevents its currency to become too strong.
