Lesson 3 of 4 · 6 min read
Interest rates & the central bank
Why a single sentence from the Fed/ECB can move the entire market.
Interest = the price of money
Central banks (Fed in the US, ECB in Europe) set interest rates. High rates = borrowing is expensive, saving more attractive → often a headwind for stocks. Low rates = the opposite.
Why growth stocks react extra
When rates are high, 'money now' is worth more than 'profit later'. Growth stocks (profits far in the future) therefore often fall harder when rates rise.
Inflation is the driver
Banks mainly raise rates to tame inflation. That's why the market watches inflation figures so closely — they predict what the bank will do.
Remember this
- Interest is the price of money: high = headwind, low = tailwind for stocks.
- Growth stocks fall harder when rates rise because their profits lie far in the future.
- Inflation is the driver: banks raise rates to tame it.
- That's why the market watches inflation figures closely.
There is a quiz for this lesson
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