Financial newspapers and websites care what certain events mean to monetary policy-makers because central bank interest rates affect everything in an investors' portfolio – some positively, some negatively.
But every rate move matters. And not just rate moves. Every nuanced utterance from central bankers, each vote pro or against moving interest rates and carefully-planned forward guidance moves markets in some way.
It doesn't stop there. Every data release will be analysed for its likely impact on economic growth, inflation and thus monetary policy.
With this much focus on the likely path and timing of monetary policy, it should come as no surprise that central bank rates are the biggest market moving force on many asset classes and securities.
Here we'll run through several of them and explain the impact of central bank interest rates and rate expectations upon each, starting with those most exposed to rate moves.
Unsecured loans, secured loans, loan/mortgage-backed securities
Rising interest rates push up borrowing costs directly and immediately on any loan, or security directly linked to a loan.
The interest you pay on a long-term loan is linked to the base rate set by the domestic central bank. When the base rate is raised, banks lift the rate of interest that they charge to borrowers, or award savers. Borrowers usually pay a higher rate than savers earn.
So, your mortgage and loan repayments or bank savings deposits are the most sensitive transactions to rate moves.
Swaps: central bank rates and credit default swaps – LIBOR
Interest rate swaps are a form of derivative contract where counterparties can swap one stream of interest, usually a fixed rate, with a floating rate of interest, which in the UK is most often based on the London interbank offered rate (LIBOR).
Credit default swaps – a form of derivative insurance against a bond or loan agreement defaulting – also use LIBOR in most of their pricing models.
LIBOR is a reference rate used by global banks to determine the short-term interest paid on loans, mortgages, bond coupons and swaps derivatives.
It is based on five currencies – US dollar, euro, pound, yen, and Swiss franc – and the interest rate expectations in the countries served by those currencies, and so is very sensitive to central bank policy.
Government and corporate bonds
Rising interest rates can have a severe impact on bond markets, and interest rate risk, along with credit risk, is a primary factor affecting bond pricing.
Inflation reduces the future returns one can expect from maturing bonds so, consequently, investors demand higher yields to compensate. This rise in the yield reflects the bond market's future expectations for interest rates set by a central bank to mitigate the effects of rising inflation.
Now, as yields on bonds rise, prices decrease. Prices rise and prices fall – that's always a risk in investment.
The bigger risk as yields rise, however, is that the issuer of the bond will become unable to afford its regular interest payments. This is called credit risk.
There's less credit risk on government bonds from rich economies – US Treasury bonds are considered the safest financial market investment with regards to credit risk. UK Gilts, Japanese Government Bonds (JGBs) and German Bunds are also seen as safe.
But, as we saw at the start of this decade in the eurozone debt crisis, government bonds issued by some economically weaker nations are at much higher risk.
Indeed, Greece – although avoiding default – needed bailout cash from the International Monetary Fund (IMF) and for investors to agree to significant reductions in its terms of repayment (called a "haircut") to avoid default. It did later, however, default on its bailout repayments to the IMF.
Corporate bonds are more at risk. Bonds issued by the Apples, GEs and Citigroups of this world can almost be considered as safe as quality government bonds.
For those bonds issued by less well capitalised and, therefore, riskier companies, investors will demand higher yields to compensate for the risk. These are known as high-yield bonds – or, simply, "junk bonds", to reflect the higher risk of default.
The low interest rate environment since the financial crisis has seen levels of high-yield bond issuance soar.
Euro-denominated junk bond issuance, from levels barely exceeding €15bn in the decade prior to 2008, topped €49bn each year since (and including) 2013, with a record €57bn in 2014.
So, think of the impact once interest rates begin to rise again in the eurozone – not only on issuance, but also on the potential default rate.
The long-term average default rate on the global high-yield bond market is 4%. Default rates rose as high as 10.3% in 2009 at the peak of the crisis, and currently stand at 2.5% with expectations of a 3% rate in 2018 as interest rates rise – it’s still a relatively benign outlook.
Central bank interest rates and currency
Foreign exchange is the biggest and most liquid of the financial markets, averaging daily turnover of a massive $5tn.
Interest rate moves and expectations are big drivers of volume trades and, therefore, prices on foreign exchanges.
Why should interest rates have an impact on currencies? It's not a direct relationship, yet higher interest rates in a country mean higher yields on its fixed income assets such as its government bonds, and therefore usually attracts greater foreign investment.
Yet there are anomalies. Despite raising two interest rate in the US this year (and a third expected in December), the dollar is down nearly 10% this year. Why?
Other factors, such as economic performance, relate back to interest rate expectations: the more economic growth advances, the more a central bank must apply interest rates as a brake to stop that economy overheating.
The US economy is currently performing nicely, but not excessively so.
It's hard to say, but sentiment is likely to have played a big part. The dollar has weakened since the election of Donald Trump as president in November 2016.
Although he promised much in terms of economic prosperity and tax reforms, his visible achievements haven't yet amounted to much, and his dislike of rate rises is well known.
Far more prominent have been any number of maverick actions and utterances that have sown chaos in his administration and perplexed the markets – not least his sabre-rattling with North Korea.
Stock markets – on the whole – hate interest rate rises. With higher interest rates, investors can just dump cash in the bank and earn returns. It means that less of an investor's portfolio is likely to be allocated to equities.
But dig down, there are certain stocks that like interest rate rises. Banks thrive when rates are higher. Loans and mortgages perform better for them and investments generate higher returns.
It also pays to watch individual stocks. Check a company's debt levels – not just business loans, but also any corporate bonds in issuance – as high debt means higher interest payments.
Very much a mixed bag here, but commodity markets are generally less affected by the force of interest rate expectations. In fact, some commodities contribute to interest rates moves.
Gold is seen as a steady hedge against inflation as it tends to hold its value relative to rising prices and interest rates.
Oil prices are dominated by the forces of supply and demand and tend not be influenced by major central bank decisions. Industrial metals and agricultural products act in a similar way. Indeed, oil, metals and agricultural commodities have an impact on inflation and, therefore, interest rates.
When demand is high and supply weak prices rise – this contributes to higher input prices for manufacturers and importers which, in turn, adds to inflationary pressure and interest rates are used to cool inflation.
Every market is affected by, or has an impact on interest rates and investors and traders need to know the likely impact of holding certain assets in their portfolios when interest rates are on the move.
And remember, markets are as much about sentiment and confidence as they are about economics. When influential investors begin to suspect the economic environment is indicating a change in central bank policy, asset prices will begin to react.
Don’t wait for the event, as the price moves and potential opportunities will have come and gone by then.