Responsibilities of the Central Bank
Abstract
Inflation is the increase in the general level of prices of goods and services in an economy over a certain period of time. This paper looks at the flaws that exist in the central bank which makes it ineffective in the control of inflation. Case examples of various central banks in various countries have been cited and ways suggested that the powers of the central bank could be amended so as to address these flaws.
There are various functions of the central bank which can range from implementing monetary policy, determining interest rates, controlling the nations entire money supply, governments banker and the bankers bank, managing the countrys foreign exchange and governments stock register, setting official interest rate and regulating and supervising the banking industry. The most important role of the Central Bank is to control inflation which maintains public expectations of a reliable and average pricing method. It accomplishes this task by primarily tightening money supply (Amadeo 2010).
Credit Control Function of the Central Bank
The Central bank has various tools which it can use in order to influence the level of money supply in the economy. Advameg Inc. (2010) lists them as reserve requirement ratio, the discount rate, and open market operations. Reserve requirement ratio is the legal ratio which is determined by the central bank, and which is required to be maintained by the depository banking institutions, in calculating the minimum reserves that they should keep. The discount rate refers to the rate at which the Central bank charges the depository banking institutions when it issues loans to them. The other popular tool is the open market operation which refers to the buying and selling of securities by the central bank so as to affect the level of money supply in the economy.
Despite the use of these tools, central banks have failed in their function of credit control. According to Bayne (2008) central banks were part of the problem of economic upheavals of the 1998 by allowing the credit crunch to break. This shows that there is a need to amend the powers of the central bank so that central banks can be consistent with their function of credit control.
Amending the powers of the Central Bank
In various countries the central bank has been charged with a lot of responsibilities to undertake. According to The Central Bank of Kenya (2008) the major responsibilities that the bank undertakes in the economy of Kenya, a developing country, are rarely below eight. The problem with these multiple objectives is that they could sometimes be in conflict or inconsistent with one another. In order for this bank and other central banks to carry out inflation control objectively, there is a need to amend their mandate to clearly state that the banks role is to achieve and maintain price stability.
The powers and responsibilities of the central bank can also be amended so as to make the central bank attain autonomy in decision making. This will mean that the central bank should have a certain independence which will assist it to be free from economic interference. Since its creation in 1935, the bank of Canada has struggled to keep free from undue political interference, while remaining receptive and responsive to government economic policy. The difficulty in reconciling these two, often opposing goals has left the Bank open to criticism and inadequate in its function of credit control (Parkinson, 2002).
The issue of political interference is centred around the powers conferred on the governor. In order to reduce this interference there is need for the powers of the central bank to be distributed across many individuals not centralizing it on the governor. In the case of Canada, the governor to the central bank is the CEO and Chairman of the Board of Directors. He is the final authority over a policy, and meets with Finance minister every week. To reduce the powers of the governor, the Act should be amended so as to allow the minister meet the whole council and policies developed made be subjected to an independent commission which will assist validate the policies (Parkinson, 2002).
In order for the central bank to control credit in the economy, all economic regions should be taken into considerations. The tools used by the central bank should be applicable with equal magnitude in all the regions of the economy. This is currently not the case since the operations of the central bank have been centralised in only specific regions. To consider the situation in Canada, it has been criticized for implementing monetary policies that are more responsive to the needs of Central Canada and to be precise Ontario, over other regions in the country (Parkinson, 2002).
Measures should also be developed to keep the directors of the central bank informed, on economic regions in their area through the creation of regional consultative panels. These panels representatives should meet with the council weekly, so as to submit reports on the economic welfare of their regions and thus able to develop measures to maintain a balanced and controlled credit in each region of the economy. Going back to Kenya, its central bank has only three branches in the whole country. As a developing country, more intervention in all the regions and provinces of the country should be required. Lack of a good national representation of all regions in making economic decision has contributed to increase the inflation rate to 26 (Central Bank of Kenya, 2008).
It is also an issue of concern to look at over independence of the central bank. Some countries have their central bank being too independent from the government. In the United States, the Fed is owned by few powerful families hence it is too independent of the government. It is argued that JF Kennedy was assassinated after he tried to interfere with their control of the monetary policy in the U.S. The European Central Bank (ECB) has complete independence from government in exercising its mandate to manage the Euro, to keep down prices and to assure financial stability. This independence is jealously protected by the Euro zone central banks, which make up the council (Barney, 2008).
Amendments should be made so as to deal with the issue of over independence and dependence of the central bank on the government. A compromise should be arrived at of which Sri Lanka has tried to hit. The bank of Sri Lanka has been given a high degree of autonomy to achieve its objectives. The bank closely liaises with the ministry of finance in making policy decisions and the secretary of the ministry of finance is a member of the Monetary Board which is the governing board of the central Bank of Sri Lanka. This level of compromise provides a good check on the Central bank and also on the government, so as to have a central bank that is free from political interference and at the same time, taking into consideration the policies set by the government for the welfare of the economy (Central Bank of Sri Lanka, 2010).
The other area that requires the powers of the central bank to be reviewed is on appointments of the key personnel. The appointment of the council members should devolve even to other regions of the country. Provincial governments should be allowed to nominate candidates for the council and the federal government should consult with the provincial governments before making appointments for the Board of Directors positions.
Conclusion
In conclusion the powers vested on the central bank need to be amended so as to deal with pertinent issues that prevent the central bank from undertaking its function of credit control. Individual economies should look at their current situation, so as to set rules and confer powers on the relevant personnel so as to deal with flaws that exist in the central bank. It is only then that we shall experience a stable economy with stability on the price level.