Glossary · Forex

Interest rate (policy rate)

The rate a central bank sets to steer borrowing costs; differences between countries' rates are a major driver of exchange rates.

By Sky Trade editorial teamUpdated November 5, 2026

The policy rate is the main lever a central bank pulls. When it raises the rate, borrowing gets more expensive, saving more attractive and the currency often more appealing to international money. A cut applies the opposite pressures.

For currencies, what matters is less the absolute level than the comparison and the surprise. If the US pays higher rates than Japan, investors have a reason to prefer dollar assets, which tends to support USD/JPY. And markets trade expectations: a hike that everyone expected may change nothing, while a hint about the next meeting can move a pair 50 pips in minutes.

Common misunderstanding: “rate hike means the currency goes up” is a tendency, not a rule. If a hike comes with gloomy forecasts, or is smaller than expected, the currency can fall.

Rate decisions are among the most volatile moments on the economic calendar, and many short-term traders simply stay out for a few minutes around them. Rate news affects Sky Trade's market pairs, not its OTC instruments. Background in what moves currency prices.

Example

A central bank raises its rate by 0.25 points, as expected, and the currency barely moves. Its statement then signals no further hikes, and the currency drops 60 pips within the hour.

Learn more in the academy

What moves currency prices: rates, inflation, jobs and risk mood
The main drivers of exchange rates explained with examples: interest rates, inflation, employment, GDP, risk sentiment, commodity currencies and safe havens.

Related terms

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