May 23, 2009 (LBO) – The primary objective of a central bank is to stabilise the value of its currency and continue to maintain that stability to facilitate long term economic growth. There could be other ancillary objectives assigned to a central bank, such as providing liquidity to the government to bridge its revenue and expenditure flows or refinancing banks’ loans to priority sectors.
But the primary objective of a central bank takes precedence over any such ancillary objective and, if there is a conflict between the two, a central bank should always give priority to its primary objective1 . This is because the success or failure of a central bank is gauged by its attainment of the primary objective and not the ancillary objectives.
Even if a central bank has done well in realising its ancillary objectives, but failed in the primary objective, then, that central bank is deemed to have failed in its operations. Hence, the key policy functions of a central bank should perforce be geared towards the attainment of its primary objective and all systems, within and outside, should be aligned to ensure it.
It is, therefore, necessary to review and monitor t