Central Bank and the Base Rate

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CENTRAL BANK AND THE BASE RATE I. Central bank. _ A central bank is an institution that is responsible for issuing currency, managing nation’s currency and banking activity. By doing so, central banks have the power to regulate the growth of the economy. There are two main kinds of central bank: the one who is independent with the Gorvenor (U.S, Japan, …) and the other is under the administration of the government (Viet Nam, Korea, …) _The functions of central bank: 1) Prints the national currency 2) Bank of the banks + Supervise all commercial banks’ activities. + Settles the mutual transactions of banks 3) Bankers, Agent and Adviser to the Government + Gives loan to the government. + Advice the government on monetary, banking and financial matters. 4) Controlling the macroeconomy by the monetary policies. It includes some tools: base rate, foreign exchange, required reserves, open market operations... In this paper, we will make a study about the base rate of central bank and its importance in the economy. II. The base rate and its function: 1. Definition Base rate is the lowest rate set by the Central Bank for lending to other banks. In Vietnam, base rate is a rate which is published by the State Bank of Vietnam as a basic for credit institutions and businesses to set their interest rate. .2.How Central bank acts on base rate: There are two ways for central banks to infuluence on base rates. -Normally the central bank effects on base rate by indirect way through open-market operations to increase or decrease total payment method -The second way is direct effect by increasing or decreasing refinancing interest rate and rediscount interest rate. 3. The importance of base rate: • It is the most important interest rate in

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