How are inflation and interest rates related?

What is the relationship between inflation and interest rates?

Inflation is closely related to current interest rates. Inflation is the rate at which goods and services are increasing in a country. In Germany, the interest rates - i.e. the amount of interest that a person has to pay his financier - are set by the European Central Bank.

Usually, a decrease in interest rates means more people can afford to borrow. This leads to higher spending, a growing economy, and rising inflation.

The opposite takes effect when interest rates rise. Citizens have less money, the economy is weakening and inflation is falling.

The central bank's experts meet several times a year to discuss economic and financial conditions within the euro zone and to determine monetary policy for the coming weeks and months. Monetary policy here means above all the availability and cost of the euro.

At these meetings, the short-term interest rates are set that keep the economy as balanced as possible. By raising or lowering interest rates, the central bank tries to minimize unemployment, to bring about stable prices and stable economic growth.

Investors and traders always keep a close eye on the decisions of the central banks. Certain markets are particularly sensitive to interest rate decisions. The exchange rate of the euro normally rises significantly in the course of an increase in interest rates.

Everything is waiting for the FED! After that, the market can tilt. Most prices run up in the 24 hours before the Fed meeting and then they sell off because the Fed did not deliver what the market wanted. > read more

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