nterest rates are rising globally. The Bank of England increased interest rates in December 2021 from 0.1% to 0.25% while countries such as Japan, New Zealand, and Brazil have all raised their respective interest rates too.
The Federal Reserve, the central bank of the United States, also seems wary of inflation and is likely contemplating raising rates this year.
How do these actions of central banks around the world impact stocks?
Interest rates can theoretically impact stock prices in a few ways. First, it can impact the profits of a business. Companies with debt will experience an increase in borrowing costs which leads to lower profits and cash flows, all else equal.
Higher interest rates can also theoretically affect stock valuations as fixed-income yields become more attractive. This means stocks require a higher rate of return – and thus a lower valuation – to compete with the now higher-yielding instruments....