Money, credit & central banks

Say it: com-MER-cial BANK
Capitals show stress; this is a reading guide, not phonetic spelling.

Think of the bank where a household or business holds an account. It assesses borrowers and provides financial services. It operates within regulation and needs to manage funding, liquidity, capital and credit risk. “Commercial” distinguishes this role from that of the central bank.

Use it naturally
a commercial-bank loan · commercial-bank deposits

Say it: CEN-tral BANK
Capitals show stress; this is a reading guide, not phonetic spelling.

A central bank can set policy rates and provide accounts for eligible banks. Its exact responsibilities vary by country or currency area. It is not normally where you open a personal current account. An independent central bank still operates under a legal mandate; independence does not mean unlimited power.

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central-bank policy · central-bank independence

Say it: MON-e-tar-y POL-i-cy
Capitals show stress; this is a reading guide, not phonetic spelling.

Policy rates and asset purchases are examples of monetary-policy tools. Their effects pass through financial markets and the wider economy over time. A policy can aim to support price stability without controlling every price or every lending decision directly.

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tighten monetary policy · loosen monetary policy

Say it: FIS-cal POL-i-cy
Capitals show stress; this is a reading guide, not phonetic spelling.

Tax cuts, higher public spending and spending reductions are fiscal choices. Borrowing may finance a gap between spending and revenue. Fiscal and monetary policies can interact, but they are different sets of decisions. Building a hospital is not the same action as a central bank buying a bond.

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expansionary fiscal policy · fiscal support

Say it: BANK de-POS-it
Capitals show stress; this is a reading guide, not phonetic spelling.

The deposit is an asset for the customer and a liability for the bank: the bank owes the account holder that amount. “Deposit” names the account balance as well as the act of paying money in. A deposit can arise when a bank lends, rather than from someone delivering cash.

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hold a deposit · deposit money · a deposit balance

Say it: CRED-it cre-A-tion
Capitals show stress; this is a reading guide, not phonetic spelling.

When a bank makes a loan, it can create a matching deposit. This adds purchasing power and an obligation to repay. Banks face lending, funding and regulatory constraints. Repaying loan principal reduces the outstanding loan and, in the banking system, destroys the corresponding deposit money; interest payments are different.

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bank credit creation · credit expansion

Say it: CEN-tral-bank re-SERVES
Capitals show stress; this is a reading guide, not phonetic spelling.

When customers of different banks pay each other, banks can settle with central-bank money. Reserves are distinct from customers’ deposit balances. A household does not normally spend reserves at a supermarket. Creating more reserves does not mean households automatically receive or spend the same amount.

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reserve balances · settle in reserves

Say it: BROAD MON-ey
Capitals show stress; this is a reading guide, not phonetic spelling.

“Broad” means the measure includes more than physical cash. Exact definitions vary across countries and measures. Keep three categories distinct: notes and coins, customer deposits, and banks’ central-bank reserves. An increase in one category does not always produce an equal increase in every other measure.

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the broad money supply · broad money growth

Say it: CRED-it
Capitals show stress; this is a reading guide, not phonetic spelling.

A lender extends credit and a borrower takes on a debt when funds are drawn. A credit limit is permission to borrow up to a maximum, not necessarily a debt already owed. In other contexts, “credit” can mean an entry added to an account; always check how the word is used.

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extend credit · access to credit · a credit limit

Say it: PRI-vate DEBT
Capitals show stress; this is a reading guide, not phonetic spelling.

The classification follows the borrower. A household mortgage is private debt even if the loan is held by a large institution. “Private” does not mean secret. It distinguishes these borrowers from government or other public-sector bodies in a macroeconomic discussion.

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household private debt · private-sector borrowing

Say it: PUB-lic DEBT
Capitals show stress; this is a reading guide, not phonetic spelling.

Government debt can be held by domestic households, overseas investors, banks or a central bank. The identity of the holder does not change who owes the money. A central bank buying an existing government bond changes its holder; the government’s obligation is not simply cancelled.

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issue public debt · service government debt

Say it: BUD-get DEF-i-cit
Capitals show stress; this is a reading guide, not phonetic spelling.

A deficit is a flow; debt is a stock. In a simplified example, £100 of revenue and £115 of spending leave a £15 deficit. Borrowing can finance that gap. Reducing the deficit from £15 to £5 still leaves spending above revenue, so debt may continue to rise.

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finance a deficit · run a deficit

Say it: GOV-ern-ment BOND
Capitals show stress; this is a reading guide, not phonetic spelling.

At issue, investors lend money under the bond’s terms. Later, investors may trade the bond with each other. Buying an existing bond from another investor does not itself hand new money to the government. UK government bonds are commonly called gilts.

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issue bonds · buy a government bond · the bond market

Say it: PRIN-ci-pal
Capitals show stress; this is a reading guide, not phonetic spelling.

Principal is different from interest, the charge for borrowing. For the example bond, the £100 promised at maturity is the principal. Its market price can be above or below £100. “Principal” also means main or most important; “principle” means a rule or belief.

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repay the principal · principal and interest

Say it: COU-pon
Capitals show stress; this is a reading guide, not phonetic spelling.

For our fixed-rate bond, the £5 annual coupon stays the same even if the market price changes. Some bonds have variable or inflation-linked payments, and some pay no periodic coupon. Start with the fixed example before extending the comparison.

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a fixed coupon · annual coupon payments

Say it: BOND YIELD
Capitals show stress; this is a reading guide, not phonetic spelling.

For current yield, divide the annual coupon by the current market price. A £5 coupon on a £100 price gives 5%; on a £125 price it gives 4%. Yield to maturity is more complete: it also accounts for repayment value, time and the remaining payments. A bond’s coupon and yield are not interchangeable.

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bond yields rise · lower yields

Say it: QUAN-ti-ta-tive EAS-ing · Q E
Capitals show stress; this is a reading guide, not phonetic spelling.

QE can support bond prices and put downward pressure on yields and wider borrowing costs. An investor selling a bond receives a different asset, not a free payment without giving something up. Effects depend on conditions and subsequent decisions. QE does not guarantee a fixed amount of consumer spending or inflation.

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introduce QE · expand asset purchases

Say it: QUAN-ti-ta-tive TIGHT-en-ing · Q T
Capitals show stress; this is a reading guide, not phonetic spelling.

A central bank can sell bonds or allow holdings to mature without replacing them. QT reduces the purchase programme’s holdings; its effects depend on how it is implemented and on market conditions. It is not identical to raising the policy rate, and its economic effects need not mirror QE exactly.

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begin QT · reduce bond holdings

Say it: AS-set-price in-FLA-tion
Capitals show stress; this is a reading guide, not phonetic spelling.

A house is an asset; groceries are consumer goods. Their prices can move differently. Higher asset prices can increase owners’ wealth while making entry harder for new buyers. Do not assume that a rise in share prices proves the same increase in the cost of everyday essentials.

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rising asset prices · housing-market inflation

Say it: DEBT-SER-vice BUR-den
Capitals show stress; this is a reading guide, not phonetic spelling.

Debt service includes scheduled interest and principal repayments. If monthly debt payments rise from £300 to £500 while income stays at £2,000, the payment share rises from 15% to 25%. Borrowers have less room for other spending. Timing and loan terms determine how quickly rate changes affect them.

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a heavier debt-service burden · service a debt

Say it: FIS-cal DOM-i-nance
Capitals show stress; this is a reading guide, not phonetic spelling.

Imagine a central bank needs to tighten policy for price stability, but pressure to keep government financing affordable prevents it from doing so. That illustrates the concern. High debt alone does not establish fiscal dominance; look for evidence that financing needs are subordinating monetary-policy objectives.

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a risk of fiscal dominance · resist fiscal pressure

Say it: DOL-lar de-NOM-i-na-ted DEBT
Capitals show stress; this is a reading guide, not phonetic spelling.

A business earning local currency must obtain dollars to make its payments. If one dollar costs four local units, a $100 payment costs 400. If one dollar later costs five units, it costs 500. The dollar payment is unchanged, but the local-currency cost rises unless protection such as matching dollar income offsets it.

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repay dollar-denominated debt · currency exposure

Say it: PRI-vate CRED-it
Capitals show stress; this is a reading guide, not phonetic spelling.

This specialised meaning often refers to non-bank funds lending directly to businesses. It is narrower than all private-sector borrowing. An ordinary bank mortgage creates private debt but is not usually called a private-credit investment in this sense. Also distinguish public credit markets, where bonds are traded, from public debt owed by governments.

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a private credit fund · direct lending

Say it: li-QUID-i-ty
Capitals show stress; this is a reading guide, not phonetic spelling.

A firm may own valuable property yet lack cash for a bill due today. Funding liquidity concerns meeting payments. Market liquidity concerns buying or selling an asset without a large price impact. Liquidity problems and insolvency are different: insolvency concerns an inability to meet obligations in a deeper financial sense, not simply the timing of available cash.

Use it naturally
provide liquidity · a liquidity shortage