Part 1: A Closer Look at the World’s Central Banks

(eToro Blog) It’s clear that nothing moves the market like interest rates. In their search for a high, albeit safe yield, interest rates expectations provide investors with a sound reason to shift their funds from one country to the next. A familiarity with the central banks, and what makes them tick will help you predict future movements, and the effect those movements will have on the future direction of a related currency pair.

Most investors are familiar with the all-mighty U.S. Federal Reserve, and its European counterpart the European Central Bank, but the major central banks in the developed world (and one in particular in the developing world) also deserve mention and an investor’s consideration.

Though not the oldest central bank, the U.S. Federal Reserve Bank (aka the Fed) is undoubtedly the most influential. Ninety percent of all currency trades involve the U.S. Dollar, and the Fed’s monetary policy has a broad effect on the value of the currency on the other side of the trade. The monetary policy decision are made by the Federal Open Market Committee or FOMC, which is comprised of seven governors of the Fed, as well as five presidents from the Fed’s 12 district banks. The Fed has a dual mandate; in one respect it is quite similar to the other central banks, and yet dissimilar in the other. Primarily, the Fed’s mandate is to achieve and maintain long-term price stability and sustainable growth. However, the Fed is also mandated to ensure full employment, which many critics believe should not be the Fed’s onus. The current head of the Federal Reserve is Ben Bernanke, who has been in that position since 2006 when he replaced Alan Greenspan.

The European Central Bank or the ECB is the “youngest” of the group, established in 1999. Monetary policy is decided by the governing council, a group of six members of the ECB’s executive board plus all of the central bank governors within the European Monetary Union’s realm. The ECB’s mandate is for long-term price stability and sustainable growth, but it also strives to ensure that inflation remains below 2% and to ensure that its common currency, the Euro, doesn’t excessively appreciate and detrimentally affect its very important trade balance. The current head of the ECB is Mario Draghi, who took the reins from Jean-Claude Trichet last year.

Established in 1694, the Bank of England or the BoE is the oldest among the major central banks. The BoE’s Monetary Policy Committee or MPC is comprised of nine members; namely the bank governor, two deputies, two executive directors and four non-BOE “experts.” The BoE’s mandate is to ensure price stability and maintain the public’s confidence in the Pound Sterling. To meet the mandate, the BoE – like the ECB – has set an inflation target, and it is incumbent upon the BoE’s governor to send a letter to the Chancellor of the Exchequer whenever that target is not met. The current head of the BoE is Sir Mervyn King, who has held that position for almost a decade.

In Part 2, we will take a look at the other key central banks, namely the Swiss National Bank, the Bank of Japan, the Bank of Canada, the Reserve Bank of Australia, the Reserve Bank of New Zealand and last, but certainly not least, the Peoples Bank of China.

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