 What is a central bank? A central bank has unique powers that differentiate it from other commercial banks. Some of these powers which influence the public in an immediate and direct way include the setting of interest rates, the issuance of currency and the management of the national payment system. No other bank in the country has such powers which shows the special place of the central bank in the economy. South Africa's central bank is the South African Reserve Bank. It was established in 1921 and is responsible for a wide range of services. The South African Reserve Bank has six main functions which will be briefly discussed next. Setting of interest rates Interest rates in South Africa are set and adjusted to contain inflation. If the expectation is that inflation will increase, the central bank will increase interest rates to contain higher expected inflation. Higher interest rates imply that borrowers will have to pay more interest on amounts borrowed but at the same time, savers will also earn more interest on their savings. The opposite is also true. With expected lower inflation resulting in lower interest rates paid by borrowers and less interest earned by savers. This policy is known as inflation targeting. Issuance of currency Currency comprises of banknotes and coins used by the public. Banknotes and coins are issued by the South African Reserve Bank and used in transactions by the public. This is an expensive function of the central bank often not recognized by the public. It is simply assumed that good quality banknotes and coins will be available for commercial transactions. Banknotes designed are printed with good security features to make forging difficult. After circulation, dirty and torn banknotes must be withdrawn from circulation and these notes must be destroyed. This is also a costly exercise. About one third of the staff of the South African Reserve Bank works in the central bank's distribution and withdrawal function. The cost of manufacture, issuance and withdrawal of currency accounts for more than 50% of the total expenditure of the South African Reserve Bank. Banknotes and coins are not the only way in which transactions can be concluded. A common alternative is the use of debit and credit cards and internet payments. For these transactions to be successful, money must flow from the account of the purchaser or payer to the account of the seller or recipient. Management of the national payment system. The successful conclusion of these transactions and the flow of funds between the parties to a transaction require a well-functioning payment system. Without a payment system, electronic payments will not be possible and all transactions will have to be concluded in banknotes and coins. This will be expensive, cumbersome and time-consuming. The South African Reserve Bank is responsible for the oversight of the smooth functioning of the South African payment system. Bank regulation. No person or institution may take deposits from the public if it is not registered as a bank at the South African Reserve Bank. The regulation of banks by the Central Bank helps to ensure a sound banking system in the country. Economic data and statistics. Businesses and individuals need data and information to make sound business decisions. The economic data and statistics published by the South African Reserve Bank are extensively used in such decisions. Without the data and statistical sources provided by the Central Bank, planning for the future will become guesswork rather than informed decisions. Custodian of South African gold and other foreign exchange reserves. Although commercial banks also hold foreign exchange reserves, the bulk of South Africa's gold and other foreign exchange reserves are held by the South African Reserve Bank. The South African Reserve Bank manages these reserves prudently which also adds to the credibility of South Africa's exchange rate policy. How independent is the Central Bank? The Central Bank works closely with government but takes its decisions independently from government. This independence ensures that decisions are taken in the best interest of the country as a whole and its entire people rather than in support of the government. The South African Reserve Bank is also the banker of the central government which contributes to the special relationship between the central bank and the government. Conclusion The South African Reserve Bank's role has become entrenched in the domestic economy since its establishment in 1921. Given its extensive role in the economy, it is hard to imagine that the country functioned without a central bank for many years but back then the economy and the financial structure were much less sophisticated than is the case today.