Handbuch Treasury / Treasurer's Handbook

S. 1038Part VI: Central Banks and Fundamental Analysis

The main objective of the world’s central banks is to ensure a relatively stable price level. Nevertheless, the ways in which central banks seek to achieve this goal are not always the same.

Statutory regulations of the countries provide the central banks with a number of instruments concerning interest or liquidity management to fulfil their objectives. Whereas the provision of central bank funds directly influences banks’ liquidity, open market rates, discount and Lombard rates act more as signals and by this mean influence the lending business of banks and the monetary and credit demands of the economy. Thereby, the central banks are in a position to influence interest rates and the liquidity situation in the money market in various ways according to their monetary objectives.

In contrast to some other countries, the monetary policy instruments of the European Central Bank are limited to interventions that leave the market forces and competition within the economy’s financial sector largely untouched. Other central banks are able to directly limit the borrowing of non-banks (setting an asset ceiling) or they can lock in the interest r...