Instituto Superior de Contabilidade e

Auditoria de Moçambique

Subject: Technical English II

Central Banking
1o year ─ Class 01 ─ Post-work

Students:

1. Armando Manuel Sigaúque

2. Énio Marcelino Martins Johin
3. Musselo Ragy Mateus Musselo
4. Nevd M. Dimande
5. Nilton Ernesto Vilanculos
6. Olímpia Baldino Sebastião
7. Sofia Flávio Almeida Magaia
Teacher: Elias Macita
 Maputo, November of 2022

1. Index………………………………………………..………………………………………..2
2. INTRODUCTION.............................................................................................................................3

3. CENTRAL BANKING........................................................................................................................4

3.1. What is the meaning of Central Banking?.............................................................................4

3.2. What is Central Banking?.......................................................................................................4

3.3. What are the objectives of Central Banking?........................................................................4

3.3.1. Price Stability..................................................................................................................5

3.3.2. Full Employment.............................................................................................................6

3.3.3. Financial Stability............................................................................................................6

3.3.4. Economic Growth...........................................................................................................7

3.3.5. Exchange Rate Stability..................................................................................................7

3.4. What are the functions of Central Banking?.........................................................................8

3.5. How can Central Banking be measure?.................................................................................9

4. CONCLUSION...............................................................................................................................11

5. BIBLIOGRAPHIC REFERENCES......................................................................................................12

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 2. INTRODUCTION
This is a theoretical research work that deals with Central Banking. In a specific and a clear way
Central Banking is a public institution that manages the currency of a country or group of countries
and controls the money supply. In this work we dig more about its concept, characteristics, how
important are, the main objective and many more.
The general idea about this research work is to illustrate how Central banking really works, what
are the benefits of it and what is the impact that brings to the worldwide.
The importance of Central Banking can be measure by how the world or a specific country
ensures their economic and financial stability. Is also important to note that central banking
expanded their toolkits to deal with risks to financial stability and to manage volatile exchange
rates, and this shows us how aware the Central banking is when it has come to financial crisis.
The main objective of Central Banking is to set the base rate, control the money supply through
open market operations, ensure banks maintain reserves and control the nation reserves of foreign
currencies.
This research work is structure in the following way:
 What is the meaning of Central Banking?
 What is the concept of Central Banking?
 What are the objectives of Central Banking?
 What are the functions of Central Banking?
 In addition, how can we measure Central Banking?
Without further ado, the reader is invite to make a global reading of the research work.

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 3. CENTRAL BANKING
3.1. What is the meaning of Central Banking?

Central Banking is an institution that manages the currency and monetary policy of a state or

formal monetary union, and oversees their commercial banking system. A central bank possesses
a monopoly on increasing the monetary base. Most central banks also have supervisory and
regulatory powers to ensure the stability of member institutions, to prevent bank runs, and to
discourage reckless or fraudulent behaviour by member banks.

Central banks in most developed nations are institutionally independent from political

interference. Still, limited control by the executive and legislative bodies exists.

3.2. What is Central Banking?

A central bank controls the supply of money as well as how it reaches the consumer. It can not
only print and inject money into the economy but also regulate how commercial banks distribute it.

A central bank controls monetary policy, which includes power over  inflation, exchange
rates, and the money supply. It has a number of tools by which it uses to control such. For
example, it can set interest rates to control inflation, buy foreign currencies to weaken the
domestic currency, and engage in open market operations by purchasing assets from financial
institutions.

In turn, the central bank uses monetary tools to meet its objectives. These range from country to
country, but generally include targets for inflation, unemployment, economic growth, and financial
stability.

We have to note that a Central Banking has key points, such as:

Being in charge of monetary policy.

Set the base rate, control the money supply through open market operations, set private
banks’ reserve requirements, and control the nation’s foreign exchange reserves.
Maintain price and economic stability

3.3. What are the objectives of Central Banking?

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 The objectives of central banks have largely changed over the years, due to disastrous economic
events. For example, back in the 1970s, the main goal of central banks was to ensure full
employment. However, the focus on employment blinded central banks attention on inflation.
Rather than maintain price stability, central banks would pump money into the economy to ensure
people were being employed. Yet this came at the cost of inflation.

For example, in 1973, a massive oil crisis that was named the ‘OPEC crises. It led to a sharp
increase in the unemployment rates across the developed world. In retaliation, central banks opened
the taps and supplied the economy with money in the hope of boosting investment and jobs.

Whilst the plan worked, it boosted employment in the short-term, but created long-term effects.
Double-digit inflation occurred into the 1980s and employment equally suffered. As a result, central
banks learnt that a more balanced approach was needed, one that focuses on several objectives
rather than one.

Examples of the central banks objectives include:

Price Stability;
Full Employment;
Financial Stability;
Economic Growth;
Exchange Rate Stability.

3.3.1. Price Stability

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 Is probably one of the leading objectives of central banks. After the high levels of inflation in the
1970s and 1980s, and the disaster that was the Great Depression of 1929, control over prices is a
key element of central banking policy.

Now, through most of the developed world, the target rate of inflation is 2 percent. The reason
for this is that it is high enough to encourage consumption, but not too high to cause panic buying,
thereby creating a cycle of greater inflation. Yet it is not too low to cause an excessive amount of
saving.

3.3.2. Full Employment

Going back through history, full employment

was one of the leading objectives of the central
bank. However, as the welfare state has
expanded and the understanding of monetary
policy increased, it has taken a backwards step.

Nevertheless, full employment is still a relatively important objective. Most central banks would
take action if unemployment starts creeping up. Usually, this is done by lowering the interest rates
to fuel cheaper credit to businesses. In turn, businesses would use the cheap credit to invest and
expand its operations, thereby stimulating jobs in the process.

3.3.3. Financial Stability

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 The central bank often acts as lender of last resort in order to maintain financial stability. For
instance, most commercial banks need short-term loans in order for them to be able to align their
assets and liabilities.

On occasion, a commercial bank may have to pay a loan to another financial institution, but their
assets are tied up in long-term loans and other illiquid assets. As a result, they need some short-term
liquidity to meet their obligations, which is where the central bank comes into play. This is crucial
in the private sector as some short-term miss-payments could cause severe consequences. One small
short-term default may lead other institutions to stop doing business with them, and customers may
start to go elsewhere. It can destroy the firm’s reputation and hence the confidence in it as an
organization. Therefore, the central bank plays an important role in ensuring confidence remains
and banks remain stable.

3.3.4. Economic Growth

Is important to central banks as it generally means

more jobs and better living conditions. When there is
economic growth, it is often associated with
increased business investment, improving
employment, and increasing demand.

Now economic growth is an objective for central

banks but is not necessarily its main one. They often have to weigh up the pros and cons, as
controlling inflation and prices may be more beneficial than stimulating the economy. Nevertheless,
central banks will often look to prop up the economy if they can do so whilst also maintaining price
stability.

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 3.3.5. Exchange Rate Stability

For one reason or another, a nation may face a currency shock by which the demand for its
currency declines rapidly. This may be due to a domestic political output or a financial crisis. In
turn, this creates instability within the markets, which central banks look to avoid.

Exchange rate instability can lead to lower levels of business confidence, as they are unable to
adequately plan their investments or business strategy. This is an even more important factor in
today’s inter-connected economies that rely heavily on international supply chains. When the
exchange rate falls heavily, the central bank may look to buy the domestic currency from the
exchange market in a bid to increase its demand and value. This can help create stability in the
market, which could significantly affect importers, the supply chain, and exporters alike.

3.4. What are the functions of Central Banking?

There are four main functions of a central bank. They are: setting the base rate, control the
money supply through open market operations, ensure banks maintain reserves, and control the
nation’s reserves of foreign currencies.

Base Rate - one of the central banks leading functions is the setting of the interest rate. Also
known as the base rate, it sets a rate, which commercial banks can borrow from the central bank. In
turn, commercial banks react with higher interest rates to the public as they are paying a higher rate
to the central bank.

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The base rate is a useful function as it acts somewhat like a tap. By increasing the rate, borrowing
from the central bank becomes more expensive for commercial organizations. In turn, loans to
businesses and consumers become more expensive, thereby reducing the circulation of money.

By contrast, a decline in the base rate is used to stimulate demand. As debt becomes cheaper to
finance, businesses and consumers demand more of it, thereby increasing the circulation of money.

Open Market Operations - it involves central banks creating money and purchasing financial
assets with it. In recent times, it has come under the naming ‘Quantitative Easing’. The aim of
which is to take away either ‘toxic’ assets as we saw under quantitative easing, or to buy up assets
and free up money to invest elsewhere.

When a central bank engages in open market operations, it firstly creates cash. Then, it purchases
financial assets such as government bonds and gilts, and other instruments. The cash then passes
over to the financial institution that it purchased them from. This then acts as new money into the
economy.

Reserve Requirements - central banks often use reserve requirements to increase and
decrease the supply of money. It does this by requiring each bank to keep back a certain percent of
each deposit they take in.
Foreign Exchange Reserves - central banks will usually hold a significant amount of
international currencies at any one point.

3.5. How can Central Banking be measure?

Central bank efficiency involves many different aspects, none of which has been the subject of
much research. Unfortunately, there have not been very many attempts to actually measure the
efficiency of central banks. Some recent studies have focused on monetary policy 4 BIS Review
24/2003 efficiency, and these have provided some valuable insights. However, the achievements of
the central bank are typically not related to its costs. On the other hand, a number of attempts have
been made to measure the cost efficiency of central banks; these have typically focused on activities
for which output is measurable, such as the production of notes and coins. Measuring the costs of
central banks is relatively easy. For example, one can look at the size of the bank's staff. The
problem, however, is quantifying output.

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 Diagram 1 shows the number of central bank employees per 100 000 inhabitants in different
countries. From this, we can see that the number of central bank employees varies greatly from
country to country. This would also apply if the number of employees were related to some other
measure of country size, such as GDP. Not all central bank functions have anything to do with the
size of the economy, however, which is probably the main reason why Luxembourg fares worst.

One probable explanation for the large differences here is that the tasks of central banks differ
from country to country. This raises the question, however, whether it is necessary for central banks
to carry out all the activities that they perform. As I mentioned earlier, I believe that central banks
should assess the scope of their operations on a regular basis. By focusing on core activities at
Sveriges Riksbank, it has been possible to cut the number of employees from about 850 in 1995 to
around 450 today.

In addition, one could go on to compare the costs of certain activities. We per-form

benchmarking in several areas, and I know that this is something that other central banks have been
doing as well. One should also compare the costs of in-house operations with those of outsourcing.
Such comparisons have led us to outsource some activities, such as cleaning services and our staff
restaurant.

One potential problem when comparing activities separately is that it presupposes that objectives
are not interrelated, and that there are no joint costs associated with the different activities.

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Recently, questions regarding the connection between price stability and financial stability have
attracted increasing attention and have given rise to a debate on whether there may be situations
where the two goals conflict with each other. In normal circumstances, however, we do not perceive
any conflict among our objectives.

When measuring costs, it is important not to count the costs of the central bank only, but also of
other parties that are important to performance. For instance, in some countries the central bank is
responsible for bank supervision, while in others this is the task of a special financial supervisory
authority. Countries also differ with respect to the private sector's involvement in fulfilling certain
objectives. In some countries, the private sector provides services that in other countries are
provided by the central bank.

Here, we believe that work that is more empirical could be done. The BIS has a natural role to
play in this respect, and that was the reason that I first contacted the BIS when I got the idea for this
workshop. I also believe that more comparisons could be made within the European System of
Central Banks to help us all improve our efficiency levels.

4. CONCLUSION
We concluded that Central Banking mission is to promote financial stability while also
regulating its currency and credit markets. We also noted that the functions of the central bank have
a great importance in the economy of a country or worldwide while playing a crucial role in
ensuring economic and financial stability. They conduct monetary policy to achieve low and stable
inflation. And we finished by stating that the soundness of the monetary and banking system of a
country depends in a large measure on the efficient discharge of these functions by the central bank.

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 5. BIBLIOGRAPHIC REFERENCES
HEIKENSTEN, Lars. How to promote and measure central bank efficiency. Stockholm: 2003.pdf

BOYCE, Paul. https://boycewire.com/central-bank-definition-objectives-and-functions. United

Kingdom: London; 2022

ACOCELLA, N.; DI BARTOLOMEO, G.; and HUGHES HALLET, A. "Central banks and
economic policy after the crisis: what have we learned?" Italy, Teramo, University of Teramo,
2012

BAKER, H. K. and RIDDICK, L. A. Survey of International Finance. Oxford, Oxford University

Press, 2012

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