The success of central bank decisions can have significant consequences for businesses. Interest rates affect the cost of borrowing, inflation influences prices and costs, and financial stability impacts business investment, as well as import/export activities. Staying up-to-date with central bank decisions is vital for companies to understand the economic landscape and make informed business decisions.
In economic theory, a plausible link exists between central bank independence and good macroeconomic outcomes, such as low and stable inflation. If monetary policy were under direct political control, politicians would be tempted to loosen monetary policy in the run-up to elections, boosting GDP in the short term, but at the price of painful and long-lasting inflation, or possibly even recession if investors are misled by cheap credit into investing in projects with unsustainable economic fundamentals.
Central banks have evolved since the gold standard era, developing a lender-of-last resort function as a way to stabilize the financial system in times of crisis. In modern economies, they are also expected to ensure a stable medium-term interest rate and act as an anchor of inflation expectations.
Despite this heightened role, there remains much debate about the best ways to achieve these goals. One approach is to use an explicit inflation targeting goal like the Bank of England and Federal Reserve, which simplifies policy and enhances communication with markets.
The Federal Reserve and other central banks have also adopted a practice of injecting massive amounts of liquidity into the financial markets during crises, known as “quantitative easing” or “QE”. This strategy increases market confidence that a central bank will be able to withdraw the additional funds from the money markets once a crisis has passed.