Interest Rates

The Interest Rate is the cost associated with borrowing money, expressed as a percentage, and is the primary monetary policy tool available for open market economies services through a central bank. This includes countries such as the United States (Federal Reserve Bank), United Kingdom (Bank of England), Canada (Bank of Canada), and the Eurozone countries (European Central Bank).

If economic indicators suggest that the economy is growing too rapidly and inflation is a concern, the Central Bank may tighten its monetary policy by increasing interest rates. This makes it more expensive for commercial banks to obtain reserve funds and this extra cost is passed on to companies and individual consumers, thereby reducing demand. Alternatively, attempts to boost the economy by lowering interest rates to increase demand for capital, is an expansionary monetary policy.

FX Market

Investors naturally look to currencies that provide the best return. If interest rates rise for a particular currency, investors will increase their holdings in that currency to profit on the higher return. The resulting spike in demand for the currency could cause it to appreciate in value when compared to other currencies.

Bond Market

The Bond Market has an inverse relationship with interest rates. A rise in interest rates may cause a decline in fixed income securities as investors seek better opportunities in either foreign currency or equities. Conversely, a drop in interest rates can make the guaranteed returns of fixed income instruments more attractive.

Stock Market

A hike in interest rates increases the cost to borrow money which could cause companies to put expansion plans on hold. For this reason, interest rate increases often have a negative impact on equities.

Market Relevance

Very High - because interest rates are the most commonly-used monetary tool of many central banks, the interest rate target indicates the direction that the central bank intends to take the economy. This provides a clear indication to investors as to the short-term monetary policy for the country in question.

When Published

Most countries publish a list of predetermined announcement dates. These can typically be found on the various central bank websites.

Volatility

High volatility for FX markets, while moderate for stocks and bonds.