The decisions central banks make have a profound impact on all our lives. It’s hardly surprising, then, that they spark interest and debate, especially when they change policy.
Central bank decisions are generally based on the opinions of the board members, which is why it’s important to understand how they’re made. Each member gets a vote and decisions are made by majority, with the Chair casting a deciding vote in the event of a tie. The decision is then formally announced to the public at a press conference held by the Governor, and minutes of the meeting are published two weeks later. This transparency helps ensure that the public can understand all the factors behind the decision.
Most central banks have a dual mandate of maintaining their nation’s financial stability and fostering economic growth, with a clear emphasis on inflation targets. When inflation is low, central banks seek to stimulate the economy with asset purchases or other measures, usually by driving down the overnight rate (also known as the policy rate). This is because the assets purchased need to stay on the central bank balance sheet for some time to deliver their intended benefits, and the additional reserves created push market rates meaningfully below the interest rate paid on reserves.
If central banks were under direct political control, politicians might try to gain advantage in the short term by loosening monetary policy, which could lead to artificially cheap credit and rapid money growth that would ultimately boost GDP. This has been a concern in countries such as Japan and the eurozone, where central banks have bought assets to try to stimulate their economies.
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