In plain words: The cost of borrowing money or the return on investment for lending money.
An interest rate sits at the centre of almost every financial decision. It is the price of money over time: what a borrower pays to use someone else's capital, and what a lender earns for parting with it. Central banks set benchmark rates, and those ripples reach mortgages, savings, and the price of nearly every asset.
How do interest rates affect your investments?
When rates rise, newly issued debt pays more, which tends to pull down the price of existing bonds that offer lower coupons. Higher rates can also cool company growth and dampen share prices. A profile aware of this link often expects more movement across a portfolio when central banks shift policy.
Why do interest rates matter for inflation?
Central banks frequently raise rates to slow spending and curb rising prices, and lower them to encourage activity. Because rates and prices are so intertwined, watching them helps explain why returns on cash and bonds change over time. To see how rates flow through to coupons, a closer look at bonds can help.
Key takeaways
- An interest rate is the cost of borrowing or the reward for lending.
- Rising rates typically push down the price of existing bonds.
- Central banks use rates to influence inflation and economic activity.