Central Bank Policy: How Important?

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Central Bank Policy: How Important?

You may have understood that currency exchange rates are also influenced by the interest rates set by the country’s central bankMeanwhile, the interest rate, which is monetary policy, is also influenced by the central bank’s assessment of economic stability and prices.

The operation of the central bank requires a leader commonly referred to as Chair, Governor, or President. They are individuals who can be said to be the “voice” of the central bank. It is they who are tasked with conveying the central bank’s monetary policy direction to the market.Every time they go to the podium, pulpit, or speak in a forum, almost certainly everyone will put their ears.

It is important for traders to know the potential of a particular central bank’s monetary policy (aka interest rate) because rising or falling interest rates will affect the strengthening or weakening of the country’s currency. Fortunately, now we can easily get access to information from the statements of central bank leaders. So, next time if Janet Yellen or Mario Draghi give a statement, open your eyes and ears wide.

Indeed, central bank leaders are not the only party who makes monetary policy for a country or economy, but each of their statements can be considered as “word”. Their statements can affect the market and are often followed by significant price movements. Even so, not all central bank leaders have the same “strength”.

The statement of the central bank leaders could be the reason behind the decision of interest rate discussions related to economic growth, to the forecast of future economic changes. Usually each of their statements is broadcast live by televisions that are specifically reporting on economic news such as Bloomberg or CNBC.

But you don’t need to be disappointed if you can’t listen to their statements directly, because as soon as the speech or announcement is delivered, you can immediately know the topic of their conversation on the internet. If you don’t subscribe to Bloomberg TV or CNBC, you can still get information through their website.

Analysts and forex traders will usually digest the statements of central bank leaders, especially if what they convey is related to economic growth or interest rates. Market reaction is more or less the same as they react to certain economic data or indicators, but specifically for interest rates, the market usually reacts more significantly, especially if it turns out the announcement of interest rates is not as expected.

Central banks today are becoming more transparent, so the market feels relatively easier to estimate the direction of the central bank’s monetary policy. Nevertheless, there is still a possibility that policy makers at the central bank will change their views. In this situation, market volatility usually increases and you must be more careful in making transactions.

“Hawkish” vs. “Dovish”

In the world of forex trading , the attitude of central bank officials is usually divided into two camps: ” hawkish” and ” dovish” , depending on how they assess certain economic conditions.

central bank official will be considered “hawkish” when they show an attitude or opinion that supports an increase in interest rates to deal with inflation, even if economic growth is slow and the conditions of the employment sector are poor.

For example, if you hear or read news like this, “the Federal Reserve estimates that there is a threat of a high inflation rate.” The Federal Reserve may be considered hawkish if they issue an official statement leading to an increase in interest rates intended to reduce inflationary pressures.

In contrast, dovish central bank officials usually pay more attention to economic growth and the employment sector than raising interest rates.They also tend to choose not to be aggressive regarding certain economic events.

You can also find some central bank officials who “stand in the middle”, or be neutral. Sometimes they show a hawkish attitude, sometimes dovish. Even so, their “original” attitude will be seen when it turns out that the market has turned extreme.

Central Bank Officials

The repeated ” central bank officials ” mentioned above are members of a “council”. For example Bank Indonesia has a “Board of Governors”; The Federal Reserve has a “Federal Open Market Committee”. One of the tasks of the “Board” is to determine monetary policy, in this case the interest rate , usually through a voting mechanism.

The following is a list of some of the world’s major central banks and their leaders and “boards”:

Central Bank Origin Mention For Leaders Current Leader Name (2016) Board Name
Bank of England (BOE) English Governor Mark Carney Monetary Policy Committee (MPC)
Federal Reserve (Fed) United States of America Chairman / Chairwoman (Chair) Janet Yellen Federal Open Market Committee (FOMC)
European Central Bank (ECB) European Union President (President) Mario Draghi Governing Council
Bank of Japan (BOJ) Japan Governor Haruhiko Kuroda Monetary Policy Board
Reserve Bank of Australia (RBA) Australia Governor Philip Lowe Reserve Bank Board
Swiss National Bank (SNB) Switzerland Chairman (Chair) Thomas Jordan Governing Board
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