Interest rates - interest rates of global central banks

What are interest rates?

The interest rate is considered one of the most important monetary policy tools used by central banks to control economic cycles. The interest rate can be defined as the price that the central bank pays on its commercial bank deposits. Interest rates are presented in the form of a percentage and are usually announced. At pre-scheduled periodic meetings throughout the year as shown in the table above.

How does the interest rate affect the price of a currency?

It can generally be said that higher interest rates increase the value of its currency; As raising the interest attracts more foreign investments, which increases the demand for the currency, and on the contrary, lowering the interest reduces the attractiveness of investing in the currency, so the demand for the currency decreases and its value decreases, for example:

High interest rates in a country increase the value of the country's currency compared to currencies with low interest rates. Although the interest rate is one of the most important factors in determining the currency exchange rate, the exchange rate against other currencies is determined as a result of many interconnected factors. Among these factors:

• Achieving a balance between interest rates and inflation
• The political and economic stability of the state
• Debt level
• Gross Domestic Product
• Trade balance
• The rate of demand for the country's products

Although current interest rates are important, the expected direction of their change is more important for traders and economic analysts in determining the direction of the currency. If interest rates are currently high, this does not mean that investors expect them to remain high for a longer period of time; the opposite is true if they are low. If most economic indicators come out negative and it becomes clear that the economy is going through a downturn, the central bank will move towards lowering the interest rate. Therefore, once the picture becomes clear, investors will begin to withdraw their investments for fear of the expected decline in interest rates, and as a natural result, the value of the currency will begin to decline.