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The importance of interest rates
Investors and traders always look to determine how the market may change. In order to determine how the price may move, investors follow factors which influence the price. One of the biggest influential factors is interest rates.
Why Interest Rates Change
Interest rates are set by the Central Bank, which is a public governing body. The Central Bank is entrusted with fighting inflation and supporting the employment sector. Inflation refers to the rise in the cost of goods and services over a specific time period. One of the ways in which central banks pressure or support inflation is by changing the interest rate. A change to the interest rate will change the cost of borrowing and the interest paid to savers. For example, the cost of mortgages and credit cards can significantly increase. Consequently, major markets such as the stock market and currencies can be affected.
Inflation and Interest Rates
Most central banks worldwide aim for 2% to 2.5% inflation rate. If the level of inflation increases above 3%, the central bank may start to consider increasing interest rates if they believe the inflation rate will not quickly drop. If inflation declines below 1%, the central bank may look to do the opposite. Decreasing interest rates is known to support economic growth, inflation, and employment.
A good example of interest rates increasing is in 2022. We can see how the Federal Reserve's increasing interest rates affect the US Dollar and the stock market. A good example of lowering interest rates was in 2009 and 2020. We can see in both years that the stock market performed well after significant interest rate cuts.
Many traders are monitoring interest rates as it's known to have a domino effect on the economy and almost all tradable assets.
So, let's start today’s course and find out how interest rates influence the world’s global trading market.