Central banks and interest rates
Why the Fed, ECB and others move every market, and how to read their decisions.
A central bank sets the short-term interest rate for its currency and manages the money supply. Its main goal is usually stable prices, often defined as inflation around 2%, and for some, such as the US Federal Reserve, also maximum employment.
The major central banks
| Bank | Currency |
|---|---|
| Federal Reserve (Fed) | US dollar |
| European Central Bank (ECB) | Euro |
| Bank of England (BoE) | Pound |
| Bank of Japan (BoJ) | Yen |
| Swiss National Bank (SNB) | Franc |
| Bank of Canada, Reserve Bank of Australia, Reserve Bank of New Zealand | CAD, AUD, NZD |
Hawkish and dovish
- Hawkish: leaning towards higher rates to fight inflation. Usually supports the currency.
- Dovish: leaning towards lower rates to support growth. Usually weighs on the currency.
What actually moves prices
The rate decision is often fully expected. The real information is in:
- the statement, and how its wording changed from last time,
- the projections for rates, inflation and growth,
- the press conference, where the governor answers questions.
Markets can move more 30 minutes after a decision, during the press conference, than at the decision itself.
Beyond currencies
Higher rates raise borrowing costs and make bonds more attractive relative to shares, so stock indices often fall on hawkish surprises. Gold, which pays no interest, tends to suffer when real rates rise.
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