Why are interest rates important in financial markets?

Interest rates play a crucial role in financial markets primarily because they determine the cost of borrowing and the return on savings. When interest rates rise, borrowing money becomes more expensive, which can lead to reduced consumer spending and business investment. Conversely, when interest rates fall, borrowing is cheaper, encouraging both consumers and businesses to take loans for purchases or investments.

Additionally, interest rates directly impact savings; higher rates can provide better returns for savers, incentivizing them to save more. This dynamic between borrowing costs and savings returns influences overall economic activity, investment decisions, and consumption patterns. Hence, understanding interest rates and their implications is essential in analyzing financial markets and overall economic conditions.