Central bank

A central bank manages a currency's monetary policy. For forex traders the important ones are the US Federal Reserve, the European Central Bank (ECB), the Bank of England (BoE), the Bank of Japan (BoJ), the Swiss National Bank (SNB), the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand.

What they do

• Set the policy interest rate, which feeds through to borrowing costs across the economy.
• Pursue a mandate, usually price stability. The Fed, ECB and BoE all target 2% inflation; the Fed also has a maximum-employment goal.
• Use balance-sheet tools such as quantitative easing when rates are already low.
• Communicate, through statements, press conferences, minutes and forward guidance.
• Occasionally intervene in the currency market directly. See intervention.

Why currencies react

Higher expected rates tend to attract capital and support a currency; lower expected rates tend to weigh on it. What matters is the decision relative to expectations. If markets fully expect a 25 basis point hike, delivering it may barely move the currency, while a surprise hold could move it sharply. The tone of the statement, described as hawkish or dovish, often matters more than the decision itself.

Practical note

Rate decisions are scheduled well in advance and are marked as high-impact on an economic calendar. Spreads often widen and prices can jump around the announcement. See central banks and interest rates.