A central bank is an independent institution which manages a country’s currency and monetary policy. Most countries have central banks, well, most countries that have their own native currencies. The United Kingdom is represented by the Bank of England, which manages the monetary policies of the Pound Sterling. (1)
Why should I care about them?
You should care about the central bank of your country because it has a great effect on you and your life. From the inflation figure to the amount of interest you get paid from savings accounts, to the amount you pay back on your mortgage. (2) It is all tied to what happens in the central bank.
More details
Interest Rates
One of the most important roles Central Banks play is the interest rates they decide, normally by voting within a selected committee/council. These interest rates are effectively the cost of borrowing, and the reward for saving.
Given the mass debt all around the world and the number of businesses that need to take on debt to expand their operations, interest rates are one of the most important metrics in global economics.
Example
You spend £500 on a new phone, you use a credit card to pay for this phone. In the terms and conditions of the credit card it says it will charge you 24% Annual Percentage Rate (APR), so about 2% per month, for this example we will ignore minimum payments and other things involving credit cards but will have a whole page dedicated to them.
For repaying your credit card, you decide to pay £100 per month back.
So, £500 divided by £100 is 5, so 5 months?
No!
Because of the 2% interest per month, you will have to spend a small amount more than the original £500 you spent. For this example it works out at £32 paid in interest, making the total price for the phone £532.
This works the other way for you as well! When you have money in a bank account which pays interest, most standard current accounts do not, then you are receiving a sort of ‘reward’ from the bank for depositing money into their institution, which is then loaned out by the bank. At the time of writing this savings accounts in the UK range from 3% to 4.5%.
Money Printing
Central banks are the money printers of modern economies, and the interest rates they set are paid out to institutions which hold the currency they manage in that same currency. The payout is in newly issued money. But these banks need to be very careful, and supply and demand are still fundamental to currencies, just like oil.
If suddenly billions of barrels of oil came onto the market, the price of oil would go down, as there is more supply than demand. However, if there was a sudden reduction in the supply of oil, just like what is happening at the time of writing this piece with the USA’s and Israel’s war on Iran, which has led to roughly 20% of the world’s oil being taken off the market, (3) the price goes up as demand is higher than supply. It is exactly the same with central banks; if they print too much money, the money that is already in circulation becomes less valuable as it pushes up inflation. (4)
Reserves
Central banks hold a variety of different assets, examples are:
- Foreign Currencies
- Gold
- Government bonds (5)
- Others, which I may go into later.
These assets are very liquid, which just means something which can easily be exchanged for cash, so if the bank needs to quickly turn these reserves into cash for whatever reason, it can do so.
Central banks hold these liquid assets in order to help in certain situations. For example, defending their own currency’s value on the international markets. A perfect, but traumatic example of this for me is when the Bank of England had to step in after the UK’s shortest-serving Prime Minister, Liz Truss, released a ‘mini budget’ which spooked the markets, for too many reasons to explain in this piece. (6)
Gold
I am sure you have either seen movies of banks storing vast amounts of gold in vaults deep underground, but for most banks around the world, like your local branch, this is not the case. But for central banks, it is. The Bank of England, at the time of writing, holds roughly 400,000 to 500,000 gold bars, weighing over 5,356 tonnes (172,204,000 fine troy ounces), worth roughly £600 billion. (7) However, this gold is not all held on behalf of the UK Government; only 310 tonnes (5.78%) of the bank’s stored gold is owned by the UK Government. (8) The rest is held on behalf of other institutions and central banks.
Reason for holding gold?
Central Banks hold gold for a number of reasons. The first is to have a safe-haven asset that can provide emergency liquidity during a crisis. (9) This helps increase confidence in the country’s monetary policy, as gold’s value often rises in a crisis. One of the other main reasons is to diversify banks’ reserves away from currency holdings, such as bonds from other countries, which also strengthens the country’s currency’s purchasing power. (10)
Central banks in the Eurozone
However, you do get situations which can become complicated with central banks and the perfect example of this is the Eurozone. There are currently 21 countries in the Eurozone. However, there is a major problem the European Central Bank has to deal with, and the best way to understand it is is to look at some of the countries within the Eurozone and their relative economic size.
The big four
- Germany – $5.05 trillion
- France – $3.37 trillion
- Italy – $2.55 trillion
- Spain – $1.91 trillion
The smallest four
- Malta – $27.77 billion
- Cyprus – $41.23 billion
- Estonia – $47.03 billion
- Latvia – $48.62 billion
The difference in economic size, and general development of countries within the Eurozone is what poses a major problem to the ECB. For example, lets say France has high inflation and the ECB increases interest rates to combat this. However, if Austria is struggling for economic growth the higher interest rates will make borrowing cost more, and potentially making economic growth harder to achieve, or possibly leading to a recession. This works the opposite way as well, by lowering interest rates, when a country is suffering from high inflation, will affect the countries with low inflation.
Other issues
- Changing these monetary rules for the Eurozone affects the countries with the highest debts meaning they need to spend more money paying interest on their debt, stretching countries’ fiscal policy.
- No safety net to fall back on if elements of the Eurozone fail, as all countries are in charge of their own taxes, there is no EU general tax for all who live in it.
- There are 20 official languages within the Eurozone, making it difficult to move to where job opportunities are is not easy. This makes the decisions by the ECB all the more important.
The positives
You may now ask why countries would join something like this, and the answer is simple. It is easier to trade between each other, there is no currency exchange costs, and political unity. Will go into more detail about this in another article.
Links to central banks
The Bank of England – https://www.bankofengland.co.uk
The Federal Reserve – https://www.federalreserve.gov
European Central Bank – https://www.ecb.europa.eu/home/html/index.en.html
Bank of Japan – https://www.boj.or.jp/en/
People’s Bank of China – https://www.pbc.gov.cn/english/130437/index.html
Swiss National Bank – https://www.snb.ch/en/
Sources
(1) – https://www.bankofengland.co.uk/monetary-policy
(2) – https://www.chase.com/personal/mortgage/education/financing-a-home/inflation-and-interest-rates
(3) – https://www.cnbc.com/2026/04/23/iran-economy-war-charts-rial-oil-strait-hormuz-blockade.html
(4) – https://www.economicshelp.org/blog/111/inflation/money-supply-inflation/
(5) – https://www.gold.org/goldhub/data/gold-reserves-by-country
(7) – https://www.bankofengland.co.uk/explainers/how-much-gold-is-kept-in-the-bank-of-england
(8) – https://www.gold.co.uk/info/uk-gold-reserves/
(9) – https://www.cbsnews.com/news/why-do-central-banks-buy-gold-experts-weigh-in/
(10) – https://www.sciencedirect.com/science/article/abs/pii/S0022199623001083