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.