How Does Central Bank Interest Rate Impact Currencies?
Explore how the central bank interest rate influences currencies. Reveal why choosing us as your data partner is critical.
The foreign exchange market is the most liquid and largest global marketplace. Analyzers and market participants should keep a close eye on various driving factors influencing currency exchange rates, including the central bank interest rate and the overall financial health of any country.
The article briefly highlights the role of central banks in regulating respective currencies and how their policies, mainly interest rates, impact currencies.
Stay tuned to go through the central bank interest rates meaning, significance, and impact. Also, reveal the importance of joining hands with reputed Forex data vendors like us.
What is a Central Bank?
A central bank is an institution known as a reserve bank or monetary authority of a country or monetary union. It mainly oversees the commercial banking system, implements the monetary policy, and issues and regulates the currency for that country or monetary union.
They maintain adequate reserves and govern the banking sector in the country to ensure commercial banks don’t face a supply deficit.
What is the Central Bank Interest Rate?
The central bank interest rate is the interest rate a central bank charges its domestic banks to borrow money, and thus it intends to stabilize the national economy.
Notably, weakening or strengthening the currency exchange rate is another significant implication of the rise or fall in the central bank interest rate. Let us discover how interest rate hike or decline influences the currencies in the upcoming segments of this article:
The Role of Central Banks
The central bank draws and implements the monetary policy per the financial objectives. The monetary policy and the interest rates reflect the government’s urge to control inflation, create employment opportunities, and control credit availability and borrowing cost.
Along with the changes in the rules and regulations for domestic banks to offer credits, the central bank interest rate also makes or breaks the currency in the Forex market. Changing current interest rates influence both inflation and currencies alike. Let’s briefly discuss these aspects:
Does The Central Bank Control Interest Rates?
Yes. A central bank announces the interest rates as the monetary authority of a country’s economy. It controls short-term interest rates by trading securities in open markets.
Rising or falling interest rates influence inflation and exchange rates, as they are the instruments to renew a bank’s liquidity. The central bank interest rate implies the credit cost of an economy.
How does Higher Bank Rate Strengthen Currencies?
Increased interest rates lead to higher ROI for lenders. They attract foreign investors. As a result, the demand for the currency improves — raising the exchange rate.
When Will Interest Rates Go Down?
Usually, a central bank decides to reduce interest rates to stimulate a stagnant or slow economy. Reduced interest rates make borrowing money cheaper for domestic banks and encourage expenses on credits and investments.
Central Banks’ Intervention to Balance Exchange Rates
Along with drawing monetary policies and regulating interest rates, central banks also intervene as buyers and sellers of their national currency in the Forex market. That way, central banks monitor the demand and supply of their national currency.
Most Significant Central Banks and Current Interest Rates
What are interest rates today? You must be curious to know them. However, let’s get familiar with the most influential central banks. Forex analyzers follow the interest rate decisions of these central banks as they influence the most liquid and highly traded currency pairs in the Forex market.
US Federal Reserve System (Fed)
The Fed is the United State’s central bank. It is the most significant central bank impacting about 80% of global transactions made in US Dollars. Its policies also affect various crosses of the US Dollar.
The Federal Reserve System draws and promotes monetary policy, protects consumers, oversees the safety of payment systems, and preserves the financial institutions of the US.
The current interest rate of the Fed (July 2023) is 5% to 5.25%.
European Central Bank (ECB)
ECB is the prime component of the Eurosystem, one of seven institutions of the European Union, and a crucial component of the European System of Central Banks. Its monetary policies drive the Euro (EUR) in the Forex market.
It was founded in 1998, and in a short span, Euro has gained momentum as a highly traded currency. The decisions made by the ECB influence the Euro Crosses and many other currencies.
The current interest rate of the ECB (July 2023) is 3.5%.
Bank of England (BoE)
The Bank of England is the basis of all modern central banks. It was established in 1694. The BoE governs the monetary and financial stability of the UK. Its policies drive the Pound Sterling (GBP) in the Forex markets.
The current interest rate of the BoE (July 2023) is 5%.
Swiss National Bank (SNB)
The SNB is the central bank of Switzerland. It draws and implements monetary policy for the country and is the sole issuer of the Swiss Franc (CHF) banknotes. Its policy decisions influence the Swiss Franc (CHF) in the Forex market.
The current interest rate of the SNB (July 2023) is 1.75%.
Bank of Japan (BoJ)
The Bank of Japan, known as Nichigin, is headquartered in Chuo, Tokyo. Its monetary policy influences the Japanese Yen (JPY) in the Forex market.
The current interest rate of the BoJ (July 2023) is -0.1% (negative interest rate).
After going through the significant central banks and their current interest rates, it is crucial to understand the importance of obtaining reliable Forex data from the most reputed data vendors for informed decision-making.
Why is Reliable Forex Data Critical?
As discussed earlier, central bank interest rates are among the most crucial factors impacting currencies. Analysts and market participants prefer following economic calendars, the latest Forex news and other sources to stay updated.
Along with these, obtaining reliable historical and real-time Forex data from reputed data providers is the best way to keep track of market performance. Back-testing your trading strategies on historical Forex data sets before and after the interest rate decisions of significant central banks is advisable.
TraderMade has been a world-renowned Forex data provider for over 30 years. They possess rich experience sourcing Forex data from reputed banks, institutions, and broker-dealer networks and aggregating it to provide an unbiased, low-latency Forex data feed.
TraderMade provides accurate Forex data via Forex API, WebSockets, and FIX protocol. You can download historical Forex data in MS Excel, Google Sheets, and CSV files. Analysts can use the historical Forex data in these formats for further analysis.
The Bottom Line
The article takes you through the meaning of central banks, central bank interest rates, their significance, and their impact on currencies. Working with the best Forex data provider helps you obtain accurate and unbiased historical and real-time Forex data and stay ahead of the ups and downs in the currency exchange rates due to changing central bank interest rates.
Choose TraderMade as your data partner to make informed trading decisions and help your app and website users get the latest and aggregated Forex data feed for a better user experience.
