When a bank like BOE, FED, ECB etc increase (hike) interest rates. Is this good for the economy and thus makes the respective currency stronger?
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Hey Hyper,
Central banks tend to raise or decrease interest rates as act of their monetery policy strategy.
Interest rate is the value of money, if a bank offers high interest rates, so people will go and deposit their money in bank deposits to get better and safe return.
If a central bank wishes to encourage people to take their money out of the bank, it will decrease interest rates so people will go look for better alternatives.
Usually, if a central bank hikes interest rates, it will make the country’s currency stronger, but not always.
hoep that helps.
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It helped. Thanks 
I was just curious because if a bank increases interest rates, more people will deposit money into banks but does it not also mean that credit cards, loans, mortgages etc will be less favourable because of higher interest? Or does it not work like that?
Interest rate changes are both reactive and proactive tools in a government’s monetary policy. The main idea is to achieve the governments targets for national growth, inflation, etc. High interest rates will attract investment from abroad which strengthens demand for the currency whilst, at the same time, diminishing domestic corporate willingness to borrow and invest in production and reducing the competitiveness of exports and reducing foreign earnings. But if an ecomony is overheating then higher rates will reduce domestic demand and also curtail inflationary pressures.
Similarly, lower interest rates should stimulate domestic corporate (and personal) borrowing and help increase exports. However, a certain degree of inflation is considered healthy because deflation encourages postponing corporate and personal spending in the hope of buying cheaper in th future. This, of course, has a very negative impact on economic growth.
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Thanks Manxx. I often here this phrase being tossed about and wondered if you could clear up what it means
“BOJ should not increase its stimulus”
What does stimulus mean? What happens if a bank increases or decreases “stimulus”?
In theory increase in interest rates make the currency appealing to everyone who wants to earn interest on their capital. It usually makes people (traders, funds) move from a currency with lower interest rate to one with a higher. However, many times the increase or decrease of interest rates is priced in the market; it may happen that a central bank increases its interest rate, then you see a spike up, and then the price starts going down.
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“Stimulus” is a Central Bank encouraging national economic growth. It can do this via various mechanisms in addition to adjusting short-term interest rate levels. In Europe and Japan, for example, these mechanisms include the Central Banks buying various bonds and other securities. By doing this they are both injecting money into the financial system and, when buying long-dated securities, also putting downward pressure on longer term interest rates. This way interest rates can be reduced across the entire yield curve.
You have probably also heard of Central Bank applying even negative rates to commercial bank deposits with the Central Bank. This means it costs those commercial banks money to store funds there and thereby encourages them to lend more.
Central Banks are nowadays very active in markets in these ways and to such an extent that even if they hint of some action it can cause very sudden reactions even without them actually doing it That places a lot of responsibility on CB’s as to how they handle and protect information regarding their actions and announcements.