What is the Central Bank?

The central bank is the main institution that controls a country’s monetary policy and coordinates the entire financial system of the economy. In the Brazilian case, it is the Central Bank of Brazil, also known as BACEN, BCB or BC.

Headquartered in the city of Brasília, the BCB was created on December 31, 1964, with Law No. 4,595. In the same process, the National Monetary Council (CMN) was created, the country’s largest monetary authority.

The Central Bank of Brazil is a federal agency linked to the Ministry of Economy and part of the National Financial System (SFN). Together with the Securities and Exchange Commission, he is one of the supervisors of the system’s currency, credit, exchange and capital.

What are the Central Bank’s functions?

The Central Bank is primarily responsible for developing monetary policy for the country’s economy, through its functions. In managing financial institutions, it seeks to maintain the purchasing power of currency and to keep the financial system functioning efficiently.

The main variable that the BC seeks to control and keep stable is inflation, through policies to control currency and interest rates.

In addition to supervising banks and financial institutions, the Central Bank acts as a “government bank”. The institution carries out the operations that are necessary to finance public spending and reserve National Treasury deposits.

In the middle of these operations, the Central Bank is able to define the interest rate that defines inflation within a target. By buying and selling government bonds, you can increase or decrease the amount of currency in circulation.

If the Central Bank understands that it will be necessary to increase the interest rate, it sells government bonds to attract a certain amount of currency and reduce its circulation. The opposite happens when the BC intends to lower the interest rate.

In general, the main functions that the Central Bank performs are:

  • Currency issue: increases the currency stock in circulation, according to the policy that it carries out and authorization by the National Monetary Council (CMN).
  • Monetary and exchange rate policy: when withdrawing or increasing the amount of currency in circulation, it carries out policies that are under its control, including when controlling exchange rate reserves.
  • Control of credit and liquidity in the economy: part of the monetary control policy consists of offering liquidity to the financial system, which becomes a credit that institutions lend.
  • Supervision of monetary institutions: banks and other financial institutions, as well as payment institutions.

The central bank’s control interest rate is the Selic rate and its definition comes from the Central Bank’s Monetary Policy Committee (COPOM), which holds meetings every 45 days.

Central Bank’s main instruments

To effect monetary policy, the Central Bank has operations in which it is in contact with the country’s banks and financial institutions.

The Rediscount Bank is lending to banks BC where the goal of the institution is to increase liquidity in the economy. The bigger this loan, the more money goes into circulation.

The Compulsory Deposit is the measure that the Central Bank adopts in order to withdraw money from the economy, making part of the assets of national banks to be deposited with it. If the requirement is less, more money remains in circulation.

Open Market operations are those in which Bacen sells or buys securities on the market. By offering bonds, you are able to attract part of the currency in the economy, and the opposite happens when you buy bonds.