The importance of interest rates

Intermediate • Course 1

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.

Take the course quiz

Derivatives are complex instruments and come with a high risk of losing money due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the risk of losing your money

NAGA is a trademark of The NAGA Group AG, a German based FinTech company publicly listed on the Frankfurt Stock Exchange | WKN: A161NR | ISIN: DE000A161NR7.

The website is owned by The NAGA Group AG and operated by NAGA Capital Ltd which is authorised and regulated by the Financial Services Authority Seychelles (FSA) under licence No. SD026. The registered address of CT House, Office 9A, 2nd Floor, Providence, Mahe, Seychelles.
Tel: +2482574498

The group also includes NAGA Global (CY) Ltd, with registered address at Nikokreontos 2, NICE DREAM, 6th floor, Flat/Office 601, 1066, Nicosia, Cyprus. NAGA Global (CY) Ltd is wholly owned by The NAGA Group AG.

RISK WARNING: Derivatives are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the high risk of losing your money. This is not investment advice. Trading with NAGA Trader by following and/or copying or replicating the trades of other traders involves high levels of risks, even when following and/or copying or replicating the Lead Traders. Such risks include the risk that you may be following/copying the trading decisions of possibly inexperienced/unprofessional traders, or traders whose ultimate purpose or intention, or financial status may differ from yours. Before making an investment decision, you should rely on your own assessment of the person making the trading decisions and the terms of all the legal documentation.

Restricted countries: NAGA Capital Ltd does not provide services for the residents of certain countries, such as Afghanistan, Albania, American Samoa, Anguilla, Australia, Austria, Barbados, Belarus, Belgium, Bermuda, British Indian Ocean Territory, Bulgaria, Burkina Faso, Canada, Cayman Islands, Central African Republic, Christmas Island, Cocos (Keeling) Islands, Congo, The Democratic Republic of the, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Falkland Islands (Malvinas), Finland, France, Germany, Gibraltar, Greece, Guam, Haiti, Heard Island and McDonald Islands, Hungary, Iceland, Iran, Islamic Republic of, Ireland, Isle of Man, Israel, Italy, Jamaica, Japan, Jersey, Korea, Democratic People's Republic of, Latvia, Libyan Arab Jamahiriya, Liechtenstein, Lithuania, Luxembourg, Mali, Malta, Montserrat, Mozambique, Myanmar, Netherlands, New Zealand, Norfolk Island, Norway, Palestinian Territory, Occupied, Pitcairn, Poland, Portugal, Romania, Russian Federation, Saint Helena, Ascension and Tristan Da Cunha, San Marino, Senegal, Serbia, Slovakia, Slovenia, Somalia, South Georgia and the South Sandwich Islands, South Sudan, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Trinidad and Tobago, Tunisia, Turks and Caicos Islands, Uganda, Ukraine, United Kingdom and any other countries where the citizens have British proof of identity (i.e. British Virgin Island, Gibraltar, Isle of Man etc.), United States, U.S. Minor Islands, Vanuatu, Virgin Islands, British, Virgin Islands, U.S., Yemen, and Zimbabwe.