Interest rate

Interest rate refers to the cost of borrowing money or the return earned on savings, usually expressed as a percentage of the amount borrowed or invested. In the context of central banks, the interest rate is the benchmark rate set to influence economic activity. When a central bank raises or lowers interest rates, it affects everything from consumer loans and mortgages to business investments and currency values.

In Forex trading, interest rates are especially important because they directly impact currency strength. Higher interest rates tend to attract foreign capital, boosting the value of that country’s currency. Lower rates, on the other hand, can weaken a currency as investors seek better returns elsewhere. Traders closely watch central bank announcements and economic indicators to anticipate changes in interest rates and adjust their positions accordingly.

Browse through other terms in our Trader’s Dictionary.