Central Bank: Everything You Need To Know

On July 9, 2025, Bank Negara Malaysia (BNM) made a move that wasn’t exactly surprising, but it still caught attention.

For the first time since May 2023, BNM slashed the Overnight Policy Rate (OPR) by 25 basis points to 2.75%. BNM’s Governor, Datuk Seri Abdul Rasheed Ghaffour, said the move was pre-emptive to keep Malaysia’s growth engine humming in uncertain global conditions.

If you’re following financial news, revisions to a country’s interest rates from all around the world pop up all the time. But here’s the thing: interest rates are just one tool in the central bank’s arsenal.

So, what exactly is a central bank? Why does it matter? And how does it shape the financial world that retail traders live in every day?

Let’s break it all down.

What Is A Central Bank?

Think of the central bank as the engine room of a country’s financial system.

It sits at the top of the monetary food chain, playing the roles of a regulator, enforcer, researcher, and the ultimate source of a safety net. It’s the one institution that can issue money, steer inflation, and rescue banks in distress.

And if it wants to, a central bank could throw the market into a tailspin with a single sentence.

When it works well, most people barely notice it.

But when it doesn’t, everyone feels it!

A (Very) Brief History Of Central Banks

Central banks have been around longer than most people realise.

The earliest versions showed up in 17th-century Europe. Sweden’s Riksbank, founded in 1668, holds the title of the oldest central bank.

But it was the Bank of England, established in 1694, that defined what a central bank could be: managing debt, stabilising the economy, and eventually taking charge of interest rates and money supply.

Fast-forward a few centuries, and central banks became less about financing wars and more about smoothing out booms and busts. The 20th century, especially post-Great Depression, is where modern central banking took shape.

Institutions like the US Federal Reserve (established in 1913) started intervening more actively, tweaking interest rates, printing money, and setting monetary policy to avoid collapses.

Today, almost every major country has one, and their influence stretches far beyond national borders.

Responsibilities Of A Central Bank

Central banks aren’t just about interest rates. Their responsibilities touch almost every part of the financial system. Here’s what they do, and why it matters to traders like you.

Guiding The Economy With Monetary Policy

This is the central bank’s most well-known job. By adjusting policy rates (like Malaysia’s OPR or the US Fed’s funds rate), they influence how cheap or expensive it is to borrow money.

Lower rates fuel spending and investment. Higher rates cool things down to fight inflation. It’s a balancing act of growth vs. stability.

Acting As The System’s Referee

Banks don’t police themselves. But central banks do. They supervise the financial sector, making sure commercial banks aren’t taking reckless risks that could spiral into a crisis.

Capital requirements, liquidity rules, stress tests: these all come from the central bank’s regulatory playbook.

Printing And Controlling Money

Central banks issue a country’s legal tender. That doesn’t just mean printing notes. It means deciding how much money should exist in the economy.

If there’s too much, you risk inflation. Too little, and the economy stalls. They also fight counterfeiting and ensure the currency remains trusted.

Managing The Country’s Currency Reserves

Central banks hold reserves in foreign currencies. Think USD, EUR, CAD, which they use to stabilise the domestic currency when volatility strikes. These reserves are also crucial for international trade, debt payments, and economic diplomacy.

Being The Lender Of Last Resort

When commercial banks run into liquidity issues (like what happened in the 2008 crisis), central banks step in. They provide emergency funding, usually in exchange for collateral, to keep credit flowing and prevent systemic collapse.

It’s the ultimate financial safety net.

Providing Research And Guidance

Don’t sleep on how much research central banks produce.

They’ve got teams of economists tracking inflation trends, wage data, employment shifts, and geopolitical risks. This information shapes their policy decisions.

Markets watch central bank reports like hawks, and traders price in every word.

The Relationship (Or Lack Thereof) Between Central Banks And Politics

Central banks are often designed to be independent for a reason – to shield monetary policy from short-term political agendas. But that doesn’t mean they’re immune to pressure.

Two recent examples show how political interference can shake market confidence. And sometimes, wreck entire economies.

1. Trump Vs. The Fed

It’s a power play drama that has been dominating headlines since Trump took command of the Oval Office in 2017.

Trump regularly slammed the Federal Reserve and its chairman, Jerome Powell, for not cutting rates fast enough. At one point, Trump even floated the idea of firing Powell, which sparked fears about the Fed’s autonomy.

When politicians pressure central banks like this, investors start to wonder:

Are we still playing by the rules? Or are the rules changing?

That uncertainty alone can hurt market stability.

2. Erdogan’s Monetary Experiment

In Turkey, things went even further.

President Recep Tayyip Erdoğan believes high interest rates cause inflation. It’s an idea that goes against basic economic theory.

He pressured the Central Bank of the Republic of Turkey to slash rates repeatedly, even as inflation surged.

He fired central bank governors who didn’t fall in line.

The result? A full-blown currency crisis.

The Turkish lira tanked, inflation exploded, and investors pulled out. It’s a case study in why central bank independence isn’t just academic.

It’s essential for market trust.

Why Political Independence Matters For Central Banks

Here’s something traders often underestimate until it’s too late: a central bank’s independence isn’t just a legal technicality. It’s the firewall between stable economies and political chaos.

Avoiding Political Manipulation

Let’s say politicians had full control over monetary policy. What do you think they’d do before an election?

Jack up spending, slash rates, and flood the economy with cash to boost short-term growth. Great for headlines. Terrible for inflation.

That’s why central banks need to maintain a distance from political agendas. To stop monetary policy from becoming a campaign tool. Independence helps them say ‘no’ when everyone else is saying ‘go.’

Credibility In Controlling Inflation

A central bank that isn’t answering to political masters can stay focused on long-term stability. That builds credibility, which is everything.

If markets believe a central bank will do whatever it takes to keep inflation under control, people adjust their expectations. Inflation stays anchored. Currencies stay stronger. Rate hikes become more effective.

It’s a feedback loop that only works if the institution’s decisions are trusted.

Operational Autonomy

There’s also the operational angle.

Independent central banks don’t need to wait for parliament or congress to sign off on rate hikes or bond-buying. They move fast. They choose their tools. They act based on data, not politics.

That kind of agility has saved economies more than once.

Legal And Institutional Safeguards

Most central banks are protected by legislation that gives their leaders fixed terms and outlines their autonomy. It’s not just tradition. It’s the law.

These rules are designed to prevent meddling and to preserve policy decisions that are rooted in macroeconomic fundamentals, not political convenience.

In short? When a central bank stays in its lane, markets can focus on signals, not noise. When it doesn’t, chaos tends to follow.

How Central Banks Move The Forex Market

If you trade forex, you’re essentially trading central bank expectations.

Their decisions (and even hints about decisions) can make or break a currency. Here’s how:

Interest Rates Drive Demand

Higher interest rates attract capital. Investors want yield, and if one country offers higher returns than another, its currency will strengthen.

That’s why currencies like the USD, when paired with strong rate policy, often surge. Cut rates too low, and the opposite happens.

Managing Currency Reserves

Central banks hold reserves in foreign currencies, and they use them.

Let’s say a currency is getting too strong and hurting exports. The central bank might sell its own currency and buy foreign ones, increasing supply and weakening it.

Or vice versa. If they want to prop it up, they’ll buy their own currency using foreign reserves.

Quantitative Easing And Open Market Moves

When a central bank buys government bonds (aka quantitative easing), it injects liquidity into the system. This usually weakens the currency. More money chasing the same goods = inflation risk.

When they sell bonds, it has the opposite effect.

Controlling The Narrative

Sometimes, words move markets more than actions.

Central banks use ‘forward guidance’, which is a carefully worded statement that signals what they plan to do. These can shift sentiment and move currency pairs long before any actual policy change.

Traders don’t just watch what central banks do. They watch what they say, how they say it, and what they don’t say.

List Of Countries And Their Respective Central Banks

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