One of the tasks of the Central Bank is to control the optimal amount of money supply in the country. In simple words: if at a certain level of production the country has a lot of national currency, prices will be higher, few – lower. A lot of money – inflation, a little money – overheating of the economy. Both conditions have negative consequences for economic development. Therefore, developed countries are laying the target inflation rate. For example, for the USA and Japan, it is 2% per year.

The effect of changing the discount rate on deposit and loan rates is one of the monetary policy instruments:

  • If the Central Bank needs to strengthen the national currency, the discount rate rises. Firstly, this makes it more attractive to external investors. Secondly, it automatically raises interest rates on loans and deposits. Therefore, when the Central Bank and commercial banks need your money, the rates automatically increase. People prefer deposits instead of consumption, and thus the money supply in circulation decreases restraining inflation.
  • If the country does not have enough money (lack of liquidity), then the Central Bank, on the contrary, through the commercial banks pumps the country with currency. Lower interest rates reduce the cost of Central Bank loans for commercial banks. Banks are lowering deposit rates (why are deposits of individuals if it is cheaper to get a loan from the Central Bank?), And credit rates are going down, which contributes to an increase in the country’s money supply.

A short summary. Why do banks need our money:

  • make money on loans and other financial transactions;
  • attract customers for cash management services, where deposits are only part of a comprehensive package of services;
  • fill the economy with liquidity in order to develop products and services.

It seems to be why the bank needs the money of customers, of course. But there are exceptions when the situation is somewhat different.

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