MARKET ANALYSIS
INTEREST RATES
Overview
Interest rates, set by central banks, influence economic activity by affecting borrowing costs. They are a critical tool for monetary policy and can stimulate or restrain economic growth. Central banks adjust interest rates to control inflation, manage economic growth, and stabilise the currency.
Key Metrics
- Federal Funds Rate: The interest rate at which depository institutions trade federal funds with each other overnight. It influences other interest rates in the economy.
- Discount Rate: The interest rate charged to commercial banks for borrowing funds from the central bank. It impacts the cost of borrowing for banks and ultimately for consumers and businesses.
Implications
- Economic Activity: Lower interest rates stimulate borrowing and spending, boosting economic activity. Higher rates can cool down an overheated economy by making borrowing more expensive.
- Investment: Interest rates influence investment decisions in housing, business expansion, and consumer spending. Lower rates encourage borrowing for investment, while higher rates discourage it.
- Currency Value: Higher interest rates can attract foreign investors seeking higher returns, boosting the currency’s value.
Factors Influencing Interest Rates
- Inflation: Central banks raise rates to control high inflation and lower them to combat deflation.
- Economic Growth: Strong economic growth may lead to higher rates to prevent overheating, while slow growth may prompt rate cuts.
- Fiscal Policy: Government borrowing can influence interest rates through demand for credit.
- Global Factors: International economic conditions and central bank policies also impact domestic interest rates.
BANK OF ENGLAND RATE
Country
Type
Interest Rate
Announced
Monthly
Description
The base or overnight interest rate is the rate at which a central bank is willing to lend money to financial institutions. This rate, then, has a trickle down effect, influencing the interest rates for commercial banks, building societies and credit unions for both saving and lending purposes.
Furthermore, it affects the prices of bonds, shares and exchange rates. In the UK, the Monetary Policy Committee sets the base rate with a primary aim of price stability, defined by the government’s inflation target.
In the UK there are 9 voters. The vote is reported in an ‘X-X-X’ format with the first number being how many voted for an increase, the second how many were in favour of a reduction and third how many voted to hold rates the same. The vote is reported 13 days after the Official Bank Rate is announced.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation. Whether high or low, interest rates influence the sales environment. In both cases, the actual numerical rate change is rarely a surprise, and is often anticipated, with analysts pricing it into markets in the days ahead of the announcement.
If, however, the outcome differs from expectations, markets can swing widely offering plenty of opportunities for those interested in financial spread betting. The language used by the head of each respective central bank is closely monitored for hawkish or dovish signals. In 2010, rates were at historic lows after the banking crisis, resulting from a coordinated effort by governments worldwide to promote lending.
FEDERAL RESERVE RATE
Country
Type
Interest Rate
Announced
8 times per year
Description
The Federal Open Market Committee is the policy-making arm of the Federal Reserve. It determines the interest rate which provides the basis not only for banks to borrow money from the lender of last resort, but it also gives banks a starting point for pricing both loans and interest-bearing products at the consumer and commercial levels.
FOMC members vote on where to set the rate with the individual votes published in the FOMC statement.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation. Whether high or low, interest rates influence the sales environment. In both cases, the actual numerical rate change is rarely a surprise, and is often anticipated, with analysts pricing it into markets in the days ahead of the announcement.
If, however, the outcome differs from expectations, markets can swing widely offering plenty of opportunities for those interested in financial spread betting. The language used by Federal Reserve Chairman is closely monitored for hawkish or dovish signals. In 2010, rates were at historic lows after the banking crisis, resulting from a coordinated effort by governments worldwide to promote lending.
European Central Bank Rate
Country
Type
Interest Rate
Announced
Monthly
Description
The base or overnight interest rate is the rate at which a central bank is willing to lend money to financial institutions. This rate, then, has a trickle down effect, influencing the interest rates for commercial banks, building societies and credit unions for both saving and lending purposes. Furthermore, it affects the prices of bonds, shares and exchange rates.
The Governing Council of the European Central Bank is composed of six executive members and 16 presidents of central banks. Measuring inflation using the harmonized index of consumer prices (HICP), the ECB has established an inflation ceiling of 2%.
The 6 members of the ECB Executive Board and 17 governors of the Euro area central banks vote on the where to set the rate. The split of votes is not publicly revealed.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation. Whether high or low, interest rates influence the sales environment. In both cases, the actual numerical rate change is rarely a surprise, and is often anticipated, with analysts pricing it into markets in the days ahead of the announcement.
If, however, the outcome differs from expectations, markets can swing widely offering plenty of opportunities for those interested in financial spread betting. The language used by the head of each respective central bank is closely monitored for hawkish or dovish signals. In 2010, rates were at historic lows after the banking crisis, resulting from a coordinated effort by governments worldwide to promote lending.
BANK OF AUSTRALIA RATE
Country
Type
Interest Rate
Announced
First Tuesday of each month, except January
Description
Reserve Bank of Australia board members come to a consensus on where to set the rate.
It is one of the primary tools used by the RBA Reserve to communicate with investors about monetary policy. It is released in the RBA rate statement which contains both the outcome of their decision and commentary about the economic conditions that influenced their decision.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation. Whether high or low, interest rates influence the sales environment. In both cases, the actual numerical rate change is rarely a surprise, and is often anticipated, with analysts pricing it into markets in the days ahead of the announcement.
If, however, the outcome differs from expectations, markets can swing widely offering plenty of opportunities for those interested in financial spread betting. The language used by the head of each respective central bank is closely monitored for hawkish or dovish signals. In 2010, rates were at historic lows after the banking crisis, resulting from a coordinated effort by governments worldwide to promote lending.
BANK OF JAPAN RATE
Country
Type
Interest Rate
Announced
Variable - about 14 times per year
Description
The Bank of Japan is the Japanese equivalent of the FOMC and MPC. It determines the interest rate which provides the basis not only for banks to borrow money from the lender of last resort, but it also gives banks a starting point for pricing both loans and interest-bearing products at the consumer and commercial levels.
Bank of Japan Policy Board members come to a consensus on where to set the rate. This figure is released through the Monetary Policy statement.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation.
Whether high or low, interest rates influence the sales environment. The Bank of Japan’s goal is to ensure price stability, but it does not have an inflation target like other policymaking bodies.
BANK OF NEW ZEALAND RATE
Country
Type
Interest rate
Announced
8 times per year
Description
The Reserve Bank of New Zealand releases its official cash rate eight times a year. As with all economies it is used a primary tool to detail monetary policy to traders and investors. The official rate is decided by the RBNZ Governor after consultation with senior bank staff and external advisors.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation. Whether high or low, interest rates influence the sales environment. In both cases, the actual numerical rate change is rarely a surprise, and is often anticipated, with analysts pricing it into markets in the days ahead of the announcement.
If, however, the outcome differs from expectations, markets can swing widely offering plenty of opportunities for those interested in financial spread betting. The language used by the head of each respective central bank is closely monitored for hawkish or dovish signals. In 2010, rates were at historic lows after the banking crisis, resulting from a coordinated effort by governments worldwide to promote lending.
BANK OF CANADA RATE
Country
Type
Interest rate
Announced
8 times per year
Description
Bank of Canada Governing Council members come to a consensus on where to set the rate. This is utilised as a principal tool for the BOC to communicate monetary policy with investors. The figure is released through the BOC Rate Statement which contains the overnight rate and commentary about economic conditions which have influenced their decisions.
Higher interest rates are used to rein in inflation, but can also stifle growth. Low interest rates fuel growth, but leave an economy vulnerable to inflation. Whether high or low, interest rates influence the sales environment. In both cases, the actual numerical rate change is rarely a surprise, and is often anticipated, with analysts pricing it into markets in the days ahead of the announcement.
If, however, the outcome differs from expectations, markets can swing widely offering plenty of opportunities for those interested in financial spread betting. The language used by the head of each respective central bank is closely monitored for hawkish or dovish signals. In 2010, rates were at historic lows after the banking crisis, resulting from a coordinated effort by governments worldwide to promote lending.
