Interest rates define how expensive money is. When rates are low, borrowing is cheap and spending increases. When rates rise, loans get costly and money flows more carefully.
It’s like adjusting the difficulty level of the economy. Low rates make growth easier. High rates slow things down and force more selective decisions.
Interest rates affect almost every asset class. Rising rates tend to pressure growth stocks, while falling rates can boost valuations and risk-taking.
They also influence inflation, market sentiment, and capital flows. Understanding rate cycles helps investors judge when markets are in risk-on or risk-off mode.
Interest rates are commonly tracked through:
- Central bank policy rates set by monetary authorities
- Yield levels on government bonds as market-based signals
- Real interest rates calculated as nominal rates minus inflation
- Rate direction over time rather than single decisions
Rate changes matter more than the absolute level.
A common mistake is reacting only to rate hikes or cuts without considering expectations. Markets often move before decisions happen.
Another error is assuming higher rates are always bad for stocks. The impact depends on growth, valuation, and broader market cycles.
