How Core Interest Rates Affect Trade

06 July 2010 - Which Way To Pay

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How Core Interest Rates Affect Trade

 

Today the Reserve Bank of Australia decided to keep the core interest rate on hold at 4.5 percent.  How does this affect traders on financial markets?

Traders and investors will have been keeping their eyes on the Bank’s rate decision for some days, and depending on their trade type (for example, share dealing or forex trade) will have been making decisions based on the expectations and speculation ahead of the rate decision.

Forex traders in Australia will be largely pleased by the Bank’s decision to keep rates the same.  This is because on the one hand, this is in line with expectation.  So, if you had taken a ‘bet’ that rates would stay unchanged, you will have made the right guess. 

General the market does not like surprises, so the fact that the rate didn’t change means that the economy is about where they predicted it to be. 

International currency investors generally take a rate increase as a sign that an economy (and therefore its currency) is worth investing in – a rate decrease and they’ll think things are not going well.  Rates staying the same, as per the forecast, means that overall the situation is not too dramatic and that monetary policy is where it should be.

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