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Relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions.
A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut.
But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market.
At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.
FED INTEREST RATE HIKE OR DIP
The Fed lowers interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing.
Fed raises interest rates are used to slow inflation and return growth to more sustainable levels. Rates cannot get too high, because more expensive financing could lead the economy into a period of slow growth or even contraction.
Mortgages
A rate cut can prove beneficial with home financing, but the impact depends on what type of mortgage the consumer has, whether fixed or adjustable.
For fixed-rate mortgages, a rate cut will have no impact on the amount of the monthly payment. Low rates can be good for potential homebuyers
Credit Cards
The impact of a rate cut on credit card debt also depends on whether the credit card carries a fixed or variable rate. For consumers with fixed-rate credit cards, a rate cut usually results in no change. Many credit cards with variable rates are linked to the prime rate, so a federal funds rate cut will.
Savings
When the Fed cuts interest rates, consumers usually earn less interest on their savings.
Certificates of Deposit and Money Market Accounts
If you have already purchased a bank certificate of deposit (CD), there is no need to worry about a rate cut because your rate is locked in. But if you plan to purchase additional CDs, a rate cut will result in new, lower rates.
BoE Meeting
- Bank of England prepares to cut interest rates after holding steady since March 2009
- Markets consider Bank of England interest rate cut a near-certainty
- FTSE 100 tipped to open slightly up at 6,601
- Sterling holds steady at $1.3328, ahead of BoE policy decision
