Interest rates are important economic drivers that influence the value of all investments and assets. Interest rates are key components of debt as they determine the rate or payment that will be owed on that debt. Interest rates also reduce asset prices through increased costs to capital, its relative value to other assets, and its inverse relationship with fixed income securities.
Interest rates are lowered in times of economic difficulty to spur spending and growth and raised in times of economic prosperity to do the opposite.* This is because low rates decrease payments on debt, increase spending, increase borrowing, and increase investment – an adrenaline shot into the economy. The inverse is true with increased interest rates.
*Interest rates are controlled in Canada by the Central Bank and in the US by the Federal Reserve.
