As we know, a successful trader must have a good understanding of the global information space. After all, this or that news can dramatically affect the rate of the currency pair, and therefore, understanding the principles of managing economic instruments on a scale of at least one country, it is entirely possible to predict how this will affect the foreign exchange trading market.
Today we will talk about the interest rate. The interest rate, also the refinancing rate, is an instrument of the Central Bank. At this rate, the Central Bank offers funds to commercial banks, which, in turn, sell them to retail borrowers at a higher percentage. That is, roughly speaking, the interest rate is the prime cost of services for the country’s com banks. Deposit and loan rates are formed from its size.
As soon as the government decides on the need to infuse investments into the economy, it raises the interest rate, and also carries out actions to increase the yield of government securities. Foreign investors take it as a signal for action and begin to invest in the economy of this country. Accordingly, there is a demand for the currency of this country, since it lists government securities and national assets. At the same time, the high rate reduces inflationary pressure inside the country. After all, with an increase in the interest rate there is an increase in deposit and credit, and both of these factors restrain consumption. After all, they are unlikely to take expensive loans and, conversely, prefer to invest in deposits than in goods.
Note that this applies to steadily developing countries. If the trust rating to the country is undermined and the economy is agonizing, then the growth of foreign investors will definitely not attract interest.
With the onset of the crisis, international investors are running in panic from the country’s economy, demand is declining, incomes of both households and enterprises are falling. To release money from the economy of the Central Bank reduces the rate. This stimulates a new round of lending, which pulls the growth of consumption and, consequently, production. The economy is growing. It is logical that with the growth of the economy, investor confidence is restored, and they together return their capital to this country.
To summarize. In the currency market, when playing with a particular currency pair, any informational news can be an indicator. The growth of the interest rate may mean strengthening the position of the national currency, and therefore it can become an attractive investment target. On the other hand, all the indicators need to be considered as a whole, since not always the growth of the interest rate may indicate the welfare of the country’s economy.