Central bank

The institution at the heart of a country’s financial system. It has many roles. Traditionally, it sets the level of short-term interest rates through its interactions with commercial banks. It uses rate changes to control inflation (often under an inflation targeting regime) and affect the level of economic output. More recently, central banks have attempted to affect long-term interest rates through quantitative easing. The central bank acts as a lender of last resort to protect the financial system from collapse; some central banks also act as regulators. Central banks also control foreign exchange reserves and can use these to intervene in the currency markets.