Why do central banks buy their own currency?

“Central banks” refers to institutions that are responsible for monitoring a particular country or state’s currency, supply of money, and lending or interest rates.  Aside from its national duties, though, most central banks also monitor and/or supervise all commercial banks within a nation or country.  This is to ensure that all monetary guidelines and rules are being followed.  Most central banks are also tasked with creating money or printing the legal tender notes of a nation.  Many people are already familiar with these basic functions by their own central banks.  However, there are those who wonder why central banks have to literally buy their own currency. The basic reason for that is that these central banks would buy out their own currency in accordance with a monetary policy to gain control over how much money is being circulated in a given economy.

With the monitoring and control of central banks through selling some assets, for example, these institutions are literally trying to buy their own currency with the hope of stabilizing the inflow and outflow of cash in a particular economy.  By buying their own currency, central banks are also able to control monetary exchange rates.  The basic effect of this move is a reduction in inflation.  For the common person, inflation means higher prices for goods and services.  Although inflation may be considered normal in modern times or may actually be a sign of a vibrant economy, most central banks will not allow inflation to go very high because of its detrimental effects on the people and the economy.  In order to control inflation rates, central banks will then want to sell some assets as a way of buying their own currency.  In this way, the excess money circulating in the economy will be addressed and the prices of goods and services will start to stabilize.

Stable exchange rates will also reflect more investor confidence, and so central banks will try to impose monetary policies in order to achieve such a stable state.  To achieve this monetary or exchange rate stability, central banks then need to buy their own currency.

 

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