Definition
A central bank is the institution that manages a country's monetary system. It controls the supply of money, influences short-term interest rates, issues the national currency, and acts as banker to the government and to commercial banks. Examples include the US Federal Reserve, the European Central Bank, and the Bank of England.
Most modern central banks operate with a degree of independence from day-to-day politics, on the reasoning that monetary decisions are better made on a long horizon than on an electoral one.
Why it matters
How it works
The main tool is the policy interest rate. Raising it makes borrowing costlier, cooling demand and inflation; lowering it stimulates spending and investment. Central banks also conduct open-market operations, set reserve requirements, and — in crises — purchase assets at scale to ease financial conditions.
A central bank typically pursues a mandate centered on stable prices, sometimes paired with maximum employment. Its effectiveness rests heavily on credibility: if the public trusts that it will deliver on its inflation target, expectations stay anchored and policy works with less effort.