What is Interest Rates?
Interest rates are the price of credit. Central banks set the policy rate (Fed funds, RBI repo, ECB deposit rate, etc.), which anchors short-term rates. Market rates form a curve from overnight to 30-year, with longer rates including expectations of future short rates plus a term premium. Real rates = nominal rates - inflation expectations. Mortgage rates, corporate bond yields, and emerging market yields all key off these benchmarks.
Why it matters for investors
Higher rates: discourage borrowing, encourage saving, reduce asset valuations (stocks, bonds, real estate), strengthen the local currency, and slow economic activity. Lower rates do the opposite. Central banks adjust rates to manage inflation and employment, but with long lag effects. The Fed pivot from hiking to cutting is one of the most-traded macro events in markets.
