How interest rates move markets

Central banks set one rate; markets reprice everything around it. This guide walks the chains of mechanics — not to predict where anything goes next, but so the connections make sense when you read about them.

The rate behind the rates

A central bank's policy rate is what banks earn or pay for the shortest-term money. Every other rate in the economy — savings accounts, mortgages, company borrowing, government bond yields — is built outward from it, with additions for time and risk. Move the policy rate and the whole structure shifts its footing.

Why bond prices move opposite to rates

A bond pays fixed amounts on fixed dates. If new bonds appear paying more, an old bond paying less becomes less attractive, and its market price falls until its effective yield matches the new reality. The same mechanism in reverse lifts old bonds when rates fall. The longer the bond's remaining life, the more of its payments live in the affected future, so the harder its price moves — which is why long-dated bonds swing more than short-dated ones for the same rate change.

Why currencies care

Money can be parked in any currency, and it tends toward where parking pays better for comparable risk. When one economy's rates rise relative to another's, holding the first currency becomes relatively more rewarding, which affects demand for it. This is a mechanical tendency, not a rule — many forces act on a currency at once — but it is why rate decisions and currency moves share headlines so often.

Why company valuations feel it

A share's price reflects, among other things, what its future profits are worth today. Discounting is the mechanism: future money is worth less than present money, and the rate used to shrink it is anchored to prevailing interest rates. Higher rates shrink the present value of far-off profits harder, which is why companies whose profits sit mostly in the distant future are described as rate-sensitive, while companies earning steadily today feel the arithmetic less.

What this guide deliberately does not say

Nothing here says which way rates will go, or what any market will do when they do. The chains above describe how the machine is connected — the direction and size of any actual move belongs to the day it happens, reported with its source.