Interest represents the cost of borrowing money or the return earned on invested capital, typically expressed as an annual percentage rate. Interest rates significantly influence financial markets by affecting borrowing costs, investment returns, currency values, and asset pricing across all markets. Central bank interest rate policies serve as primary tools for managing economic growth and inflation.

Interest rate changes create broad market impacts, with rising rates generally supporting currency values while pressuring bond prices and interest-sensitive sectors like real estate and utilities. Interest rate differentials between countries drive currency exchange rates and international capital flows. Understanding interest rate dynamics is fundamental to successful trading and investment strategies.

Real-world example: The Federal Reserve raises interest rates from 2% to 2.5%, causing the U.S. Dollar to strengthen, bond prices to decline, and bank stocks to rally as higher rates improve lending margins and profitability prospects.