Equity Market

In-directly, the Central Bank interest rate decisions impact the equity market. A period of low interest rates has provided the stock market with ammunition to move higher. Some investors move out of cash positions and into higher risk investments like stocks and ETFs. During a low interest rate environment, the Central Bank may also increase its quantitative easing program. Essentially they print more money which flows downstream to banks and borrowers. The Central Bank is making it easier for consumers to access loans which flow back into the economy – thus consequently pushing the equity market even higher. 

Once an economy overheats due to rising inflation, a central bank will begin to wind down its “loose” monetary policy and begin to raise interest rates and decrease its QE program. As the stock market performs well during a decreasing interest rate environment, the opposite may also occur when interest rates rise. The term “taper tantrum” is a known phenomenon in the financial markets and has occurred on a number of occasions. The stock market may face a period of selling pressure once a Central Bank pivots from a low interest rate environment to an increasing interest rate environment. This is due to the market re-adjusting to the potential decrease in the money supply.