What is interest rates and how it will affect stock market and FOREX?

The key interest rates of USA and Europe are most important for world economy. They controlled by comitees from each side and supposed to reflect the health of the economy. But, because, those two factors affect almost every aspect of business life, the changes in the interest rates extremly influencing stock and forex market.

Key Interest Rate is a formal indicator, which simply should mean a cost for borrowing money from a third party. Of course, it does not mean for shure You will find a bank, who will give you money for such interest rate. Normally, it will be couple percentage points more expensive.

At present time (April 2006) the key interest rates are:

  • USA - 4.75% - Federal Reserve Board USA
  • Europe - 2.5% - The European Central Bank
  • UK - 4.5% - The Bank of England

As an example, in the period 2001 - 2006 The FED cut key inerest rates 13 times (from 6% down to 1%) in respond to equity market crisis of 2001, terror attacks and wars. After US economy started to show some strength, The FED began to rase interest rates in June 2004.

As opposite, because of crisis in the European economy still last, banks of England and Europe does not rising key interest rates that much.

In the next aticle we’ll explain the influence of key interest rates on foreign currency exchange market.