Central banks are responsible for setting the interest rates that determine the cost of borrowing for businesses and individuals. When a central bank lowers interest rates, it incentivizes borrowing and spending, which can stimulate economic growth. This, in turn, tends to push stock prices higher as companies benefit from increased consumer spending and investment. On the other hand, when a central bank raises interest rates, it makes borrowing more expensive and can slow down economic activity. This often leads to a decline in stock prices as investors become more cautious and demand for stocks decreases. However, the impact of central bank policies is not limited to stock markets. Bond markets are also heavily influenced by these policies. When interest rates are lowered, bond prices tend to rise as investors seek higher yields. Conversely, when interest rates are raised, bond prices tend to fall as new bonds with higher yields become available. Central bank actions can also affect exchange rates, which have significant implications for international trade and investments. For example, when a central bank lowers interest rates, it can lead to a decrease in the value of a currency as investors seek higher returns in other countries. This can make exports more competitive but also increase the cost of imports. On the other hand, when a central bank raises interest rates, it can strengthen the currency and make imports cheaper but also make exports more expensive. Overall, the decisions made by central banks have far-reaching effects on financial markets and can significantly impact investment portfolios. Therefore, it is essential for investors to stay informed about central bank policies and their potential consequences. By understanding the relationship between central bank actions and financial markets, investors can make more informed decisions and navigate the ever-changing landscape of the global economy.