Key Terms
Central bank
The institution that issues a currency, sets its policy interest rate and serves as the bank that other banks bank with.
By the Investfora Research Desk
A central bank is the institution that issues a currency and sets the policy interest rate attached to it. It is the bank that other banks bank with: commercial banks hold accounts there, settle payments with one another across those accounts, and borrow from or deposit with it at rates it chooses. Those rates anchor the cost of money through the rest of the system. It is not a commercial bank — it does not take deposits from the public or lend to households and firms in the ordinary course of business.
A worked example
Suppose a hypothetical central bank sets its policy rate at 2 per cent, then raises it by 50 basis points to 2.5 per cent. A commercial bank that prices a floating-rate loan at the policy rate plus 3 percentage points would move that loan from 5 per cent to 5.5 per cent — one contract's arithmetic showing how a policy change passes through.
The term names an institution and its levers, not the effect of pulling them. It does not say how far or how fast a policy change reaches other rates, and it does not fix a mandate: what a central bank is asked to achieve differs from one jurisdiction to another.