What is a central bank?
A central bank is the chief guardian of a country’s money and banking system. Ordinary banks take deposits from people and make loans; the central bank holds those banks’ deposits, lends to them when needed, sets their rules and supervises them. It also issues the country’s banknotes and acts as the government’s banker.
Bangladesh’s central bank is Bangladesh Bank. It was set up under the Bangladesh Bank Order 1972, with effect from 16 December 1971, and its head office is in Motijheel, Dhaka. The preamble of the law sets out its aims: keeping the domestic value of money stable, keeping the taka’s external value competitive, and helping the country’s productive resources grow.
Say Nasrin goes to a bank in Motijheel and sends money by cheque to an account at another bank. Between the two banks, the money actually moves through their accounts at Bangladesh Bank. The governor’s signature on the Tk 500 note in her hand, the interest rate on her FDR, and how many taka her brother’s remittance from abroad turned into, all have Bangladesh Bank’s rules and decisions behind them.
Why it matters to an investor
- To read the direction of interest rates: when the central bank raises or cuts its policy rate, deposit, loan and treasury bill rates usually follow within a while.
- To read the inflation outlook: keeping prices stable is one of its main jobs. Its actions show how worried it is about inflation.
- To understand moves in share and bond prices: a change in interest rates can shift both bond prices and the mood of the stock market.
- To understand the rules around bank deposits: deposit protection, bank licences and supervision all sit with the central bank.
Bangladesh Bank’s main functions
Article 7A of the Bangladesh Bank Order 1972 lists Bangladesh Bank’s main functions. In plain words, they are:
- Making and carrying out monetary policy: managing the amount and cost of money in the economy through the policy rate and other tools.
- Setting policy for intervening in the foreign exchange market, and holding and managing the country’s official foreign reserves.
- Advising the government on how monetary policy interacts with fiscal and exchange-rate policy.
- Promoting and regulating a safe and efficient payment system, including issuing banknotes.
- Regulating and supervising banks and finance companies.
Two more familiar roles
Banker to the government: Bangladesh Bank keeps the government’s accounts, runs the auctions of treasury bills and bonds on its behalf, and handles government payments. Banker to banks and lender of last resort: if a bank suddenly runs short of cash, Bangladesh Bank can lend to it against collateral. This is called being the lender of last resort.
A word on the exchange rate: since 2003 the taka’s exchange rate has officially been market-based, meaning Bangladesh Bank does not fix it directly, though it can buy or sell dollars to smooth large swings. The way the rate is managed has changed several times over the years and may change again.
What a central bank does not do
- It does not open accounts for the public or lend to individuals; its customers are mainly the government and banks.
- It does not regulate the stock market; that is the job of the Bangladesh Securities and Exchange Commission (BSEC). Insurance is overseen by the Insurance Development and Regulatory Authority (IDRA).
- It does not guarantee returns on any particular investment. Its job is to keep the system as a whole stable.
Common mistakes
- Thinking the central bank can solve every problem by printing money. When money grows faster than goods in the economy, inflation rises.
- Treating policy-rate news as unrelated to your own savings. When it changes, deposit, loan and bond rates tend to follow over time.
- Assuming that because the central bank supervises a bank or institution, there is no risk at all.
- Taking a stock-market or insurance complaint to Bangladesh Bank; first check which regulator oversees what.
The central bank looks after the value of money and the stability of the banking system; its decisions reach your savings through interest rates.