# A tale of two central banks – what the latest interest rate decisions mean for investors Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2017-03-18 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: Federal Reserve Rate Rise Signals Confidence in US Economy Meta Description: Find out how the Federal Reserve and Bank of England decisions are affecting property, bonds, and currency investments. Stay informed with easyMarkets. URL: https://financedigest.com/a-tale-of-two-central-banks-what-the-latest-interest-rate-decisions-mean-for-investorshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/1-25-1736844064243-compressed.jpg) - **Federal Reserve rate rise signals confidence in US economy** - **Bank of England continues to hold rates in anticipation of Brexit** - **Property, bonds and currency investments all impacted by latest decisions (easyMarkets)** It’s been decision time for two [central banks](https://www.financedigest.com/central-banks-opt-for-shock-and-awe-to-tame-inflation.html "Central banks opt for shock and awe to tame inflation") this week. On Wednesday, the Federal Reserve decided to raise interest rates in the US to 1.00%, which didn’t surprise anyone as it was in line with expectations.  [Stocks](https://www.financedigest.com/mutual-funds-vs-stocks-which-is-better.html "Stocks") rose and the dollar slid as a result. Now, the [Bank of England](https://www.financedigest.com/markets-could-face-sharp-correction-bank-of-england-warns.html "Markets could face ‘sharp correction’, Bank of England warns") hasn’t surprised anyone either, by keeping interest rates in the UK at 0.25%. **“‘It was the best of times, it was the worst of times.’  The opening line from Charles Dickens’ classic ‘A tale of two cities’ has always been a favourite of mine. Over the last 48 hours, we haven’t seen either the best or worst but we’ve certainly seen interesting times as we have had two very different decisions from two different** [central banks.”](https://www.financedigest.com/central-banks-start-turning-off-the-cash-taps.html "Central banks start turning off the cash taps") **James Trescothick, Reputation and Education Manager,** **[easyMarkets](http://r20.rs6.net/tn.jsp?f=001OSiEYFbogYZDN2usocLYUiMilhCNf_YxGvqyEw7tTZ6mYJ0vL0GhrCRpij0a3K72DICYvlDk7sEaFl4U2gZDPNQxs5jxAdSSWBeq-NMKuq-XfA7MW5M4ekXjoZms0Swsg-m_fuW0njdImwtrrPvfxwnc-biGpFZjA98JnFbGOznqsdIasyznyg==&c=QlV7raceLSHHDc-uqhksGADv0UF0yhyJfT2K6-8GFexgK_-l-puGhA==&ch=sYisEsKnRFBsW0U_6oVUQWgUHcR0lBnnGvLCNk59jJbQYeMop6rxVA==)** But our main protagonists haven’t always announced decisions which met expectations, and those kinds of surprises tend have a big [effect on markets](https://www.financedigest.com/the-npwt-suction-pads-market-to-grow-on-an-effective-and-accessible-note-backed-by-innovation.html "The Npwt Suction Pads Market to grow on an effective and accessible note backed by innovation"). Just a couple of years ago, there was talk of a race to [see whether the UK or the US would raise interest rates](https://www.financedigest.com/key-fed-official-sees-rates-liftoff-in-2023-as-policy-debate-heats-up.html "Key Fed official sees rates liftoff in 2023 as policy debate heats up") first. However, rapid [political and economic](https://www.financedigest.com/stocks-tumble-globally-on-raft-of-economic-political-worries.html "Stocks tumble globally on raft of economic, political worries") change meant that though the US economy has carried on its revival after the 2008 financial crisis, the UK economy has stumbled into uncertainty as a result of the Brexit vote. Interest rate decisions affect different types of investments in different ways, so the team at forex and CFD broker easyMarkets has put together a quick guide on how each type of investment correlates to interest rate decisions. **The easyMarkets guide to investment and interest rates** **The currency market** ![coins](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/coins-201x300-1736844064029-compressed.jpg) One of the strongest influences that [drives the forex markets](https://www.financedigest.com/rocket-missile-market-advantages-offered-by-rockets-missiles-and-increasing-adoption-of-missiles-to-drive-market.html "Rocket & Missile Market – Advantages Offered By Rockets & Missiles And Increasing Adoption Of Missiles to Drive Market") is interest rate decisions, for two main reasons. First, the [higher the interest rate](https://www.financedigest.com/uk-house-prices-fall-by-most-since-2009-higher-rates-to-bite-nationwide.html "UK house prices fall by most since 2009, higher rates to bite-Nationwide"), the higher the rate of return on the investment. Higher interest rates can attract foreign investment, which then increases [demand and causes the value of that country’s currency to rise](https://www.financedigest.com/analgesics-market-value-surpasses-us-77-3-bn-as-demand-for-nsaids-rise-at-4-1-fmi.html "Analgesics Market Value Surpasses US$ 77.3 Bn as Demand for NSAID’s Rise at 4.1%: FMI"). Second, for day traders, higher interest [rates are often seen](https://www.financedigest.com/dollar-bounces-as-fed-seen-keeping-up-aggressive-rate-hikes.html "Dollar bounces as Fed seen keeping up aggressive rate hikes") as an indication of the perceived strength of a country’s economy. This can mean that the country’s currency can [gain](https://www.financedigest.com/evergrande-jitters-pull-risk-currencies-lower-dollar-gains-on-safety-bid.html "Evergrande jitters pull risk currencies lower, dollar gains on safety bid") strength against another country’s currency, if that economy isn’t considered as strong or as stable, hence the potential to make gains in the change of currency movements. The aforementioned is why, when a nation’s economy is under pressure, a government or [central bank](https://www.financedigest.com/central-banks-start-turning-off-the-cash-taps-2.html "Central banks start turning off the cash taps") can choose to implement a loose monetary policy, by either increasing the supply of money or decreasing interest rates to encourage borrowing. This tends to make credit cheaper and in turn potentially create more spending and [economic growth](https://www.financedigest.com/oil-prices-hold-firm-amid-hopes-for-economic-growth.html "Oil prices hold firm amid hopes for economic growth"). The opposite course of action – a tight monetary policy – sees the central bank constrict spending in an economy either because it views the economy to be growing too quickly, or to [slow down inflation](https://www.financedigest.com/spains-12-month-inflation-slows-down-again-in-december-to-5-8.html "Spain’s 12-month inflation slows down again in December to 5.8%"). [Central banks do this by raising interest rates](https://www.financedigest.com/czech-central-bank-vice-gov-unlikely-to-vote-for-rate-cut-newspaper.html "Czech central bank vice-gov unlikely to vote for rate cut -newspaper"). Day traders look for hints for when these two different policies may occur to help them speculate on when a currency may decrease or increase against another. **Bonds** There is an inverse relationship between [bond prices and interest rates](https://www.financedigest.com/ecb-could-slow-rate-hikes-but-bond-run-off-should-start-soon-knot-says.html "ECB could slow rate hikes, but bond run-off should start soon, Knot says"). Bond prices tend to fall when interest [rates rise](https://www.financedigest.com/analysis-traders-ready-for-wilder-swings-as-rate-rises-stoke-volatility.html "Analysis: Traders ready for wilder swings as rate rises stoke volatility"), and rise when interest rates fall. The reason for this is simple. One way for corporations and [governments to raise capital is by selling bonds](https://www.financedigest.com/lg-says-not-a-forced-seller-of-uk-government-bonds.html "L&G says not a forced seller of UK government bonds"). [Higher interest rates make the cost](https://www.financedigest.com/ds-smith-says-cardboard-box-volumes-strong-flags-higher-costs.html "DS Smith says cardboard box volumes strong; flags higher costs") of borrowing more expensive, which tends to lower the demand for lower-yield bonds. Hence their [price tends to drop](https://www.financedigest.com/oil-prices-head-for-fourth-weekly-drop-as-demand-fears-weigh.html "Oil prices head for fourth weekly drop as demand fears weigh"). When interest rates fall, so does the cost of borrowing, which usually leads to more companies issuing new bonds for growth. This tends to increases demand for higher-yield bonds, which can then push bond [prices to rise](https://www.financedigest.com/oil-prices-rise-as-weaker-dollar-offsets-china-covid-19-concerns.html "Oil prices rise as weaker dollar offsets China COVID-19 concerns"). [**Property investment**](https://www.financedigest.com/the-hidden-costs-of-property-investment.html "The Hidden Costs of Property Investment") Generally speaking, a raise in interest rates means borrowing becomes more expensive, while an interest [rate cut](https://www.financedigest.com/russias-2022-inflation-seen-at-13-4-more-rate-cuts-to-come-reuters-poll.html "Russia’s 2022 inflation seen at 13.4%, more rate cuts to come: Reuters poll") means borrowing becomes cheaper. When it comes to property investors, a change in interest [rates can change the value of monthly](https://www.financedigest.com/dutch-governor-knot-signals-ecb-will-keep-raising-rates-in-months-ahead-ft.html "Dutch governor Knot signals ECB will keep raising rates in months ahead- FT") mortgage repayments. Logically, when interest rates are low and borrowing is cheaper, property [investors](https://www.financedigest.com/some-uk-property-funds-defer-investor-withdrawals.html "Some UK property funds defer investor withdrawals") are incentivized to purchase new properties. When interest rates are high, they will be less likely purchase, as mortgage payments would be higher. **“Interest [changes influence](https://www.financedigest.com/exploring-the-profound-influence-of-regulatory-changes-on-the-financial-industry.html "Exploring the Profound Influence of Regulatory Changes on the Financial Industry") different markets in different ways. Indeed, markets can sometimes be affected by the mere speculation of interest rate decisions, before the actual decisions have been made. A good percentage of market movements throughout the year can thus be attributed to interest rates. Thus, regardless of your investment choices or style, interest rates should be of interest to you.”** **James Trescothick, easyMarkets** --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---