One major factor with a direct impact on currency value is the interest rate associated with the particular currency.
These interest rates are usually set by the country’s central bank and for that reason, forex traders and analysts always keenly follow central bank policy changes and announcements.
The real interest rate is not really what counts for forex traders but rather the expectation of where the interest rate is headed.
For this reason, it is beneficial to know what makes central bank tick and factors that lead to their changing their interest rates.
Trading in currency is dominated by about 8 major currencies and that makes their respective central banks the most followed.
The United States Federal Reserve (The Fed)
This is arguably the world’s most influential central bank and more so due to the fact that about 90% of the world’s currency trades are made with the USD as one half of the currency pair.
The Fed’s interest rates are determined by the Federal Open Market Committee (FOMC) which constitutes 5 presidents from the 12 district reserve banks and 7 governors drawn from the Federal Reserve Board.
They meet 8 times a year and their mandate is to ensure the long term stability of dollar prices and sustainable economic growth.
The European Central Bank (ECB)
Established in 1999, the ECB is run by a governing council which constitutes 6 members drawn from the ECB’s executive board and the 12 governors of all the national central banks from the 12 euro zone countries.
The bank’s mandate is maintain sustainable growth, limit consumer price growth to levels below 2%, and maintain currency price stability.
The bank usually gives ample notice when there are impending changes. The governing council meets every fortnight though interest rate decisions only happen about once a month.
The Bank of England (BoE)
Regarded as the world’s most efficient central banks, the BoE interest rates are set by a monetary committee which consists of the bank’s governor, his two deputies, 2 of the bank’s executive directors, and 4 experts drawn from outside the bank.
The bank’s monetary policy mandate is to maintain currency confidence and price stability. They do this by sticking to a 2% inflation target.
The Bank of Japan (BoJ)
Interest rates in Japan are set by the BoJ’s monetary policy committee which consists of the bank’s governor, his 2 deputies, and 6 members.
The bank has in the past artificially weakened its currency by entering the forex market to sell its own currency against the USD and EUR.
Its mandate is to keep prices low to protect export trade and ensure the stability of Japan’s financial system. The monetary policy committee meets once or twice monthly.
The Swiss National Bank (SNB)
The interest rates for Switzerland are set in a band rather than a specific target like other countries and are set by a 3-person committee.
Its mandate is ensuring price stability and the committee meets every 3 months.
The Bank of Canada (BoC)
Interest rate decisions in Canada are made by the BoC governing council which is made up of the Bank’s governor and his/her 5 deputies.
The BoC’s mandate is maintaining the value and integrity of the CAD and to maintain an inflation target of 1-3%. The governing council meets 8 times yearly.
The Reserve Bank of Australia (RBA)
Aussie interest rates are set by the RBAs monetary policy committee consisting of the governor, the deputy governor, the secretary to the treasury, and 6 government-appointed independent members.
With an annual inflation target of 2-3%, the banks mandate also includes welfare and economic prosperity of the people, full employment, and currency stability.
The committee meets every first Tuesday of all months except January.
The Reserve Bank of New Zealand (RBNZ)
Contrary to all other banks mentioned, the New Zealand interest rates and other monetary policy are set by the RBNZ governor, and this happens 8 times annually.
The RBNZs mandate including avoiding output instability, maintaining price stability, and maintaining stable exchange rates.
The New Zealand inflation target is set at 1.5% with a dismissal of the governor if the target is not met.
