{"id":480455,"date":"2023-04-14T13:48:18","date_gmt":"2023-04-14T12:48:18","guid":{"rendered":"https:\/\/www.finder.com\/uk\/?page_id=480455"},"modified":"2024-10-14T09:03:59","modified_gmt":"2024-10-14T08:03:59","slug":"how-interest-rates-affect-stock-market","status":"publish","type":"post","link":"https:\/\/www.finder.com\/uk\/share-trading\/share-trading-guides\/how-interest-rates-affect-stock-market","title":{"rendered":"How do interest rates affect the stock market?"},"content":{"rendered":"

Interest rates and the stock market aren\u2019t directly connected. But increases or decreases in interest rates can noticeably affect stocks and not necessarily in ways you might expect. Here\u2019s what you need to know.<\/p>

What are interest rates?<\/h3>

Interest rates are an amount that borrowers are charged by banks and other financial institutions on the money they borrow, or savers are paid on the money they save, typically expressed as a percentage of the amount borrowed or saved.<\/p>

Banks and the like can choose the interest rates they charge on loans and pay on deposits, but these interest rates are often heavily influenced by that set by a country\u2019s central bank. This rate is the interest rate the central bank pays to commercial banks that hold money with it. In the UK, this is the Bank of England base rate (also known as the \u201cBank Rate\u201d). In the US, for example, it\u2019s a rate set by the Federal Reserve.<\/p>

How is the Bank of England base rate set?<\/h3>

As the name suggests, the UK\u2019s base rate is decided on by the Bank of England. A team of financial experts reviews the rate regularly and decides what the base rate should be. The state of a country\u2019s economy, and in particular the level of inflation, can greatly impact base rate decisions.<\/p>

When do interest rates change?<\/h3>

That depends on the specific interest rate you\u2019re talking about.<\/p>

The Bank of England\u2019s monetary policy committee (MPC) meets 8 times a year to discuss and set the UK\u2019s base rate. That\u2019s roughly every 6 weeks. But that doesn\u2019t necessarily mean that the base rate changes this often. In fact, the base rate can stay the same for years at a time. Until December 2021, the base rate had been set at a steady 0.1% for nearly 2 years. And there have been longer periods of static base rates previously.<\/p>

But, in times of economic turbulence, things can change much more frequently as the Bank of England attempts to stabilise the economy. During 2022 and 2023, inflation has been high in the UK, so the bank has made frequent base rate hikes in an attempt to bring inflation back down to its target of 2%. As of October 2024, the base rate was 5%.<\/p>

Financial institutions that lend money or hold deposits can set their own interest rates and change them whenever they want. However, to be competitive and attract customers (as well as to reflect their own costs), the rates are often heavily influenced by Bank of England base rate changes. So, we often see banks adjusting their advertised interest rates shortly after a base rate change.<\/p>

How do interest rates affect stocks?<\/h3>

There\u2019s no direct link between interest rates and the value of stocks. A change in one won\u2019t automatically trigger a change in the other. However, changes in interest rates do have the potential to affect other factors which can, in turn, influence the value of stocks. These include:<\/p>