What happens when interest rates change?

When a central bank changes its policy rate, the effect does not reach everything at once; it travels through the financial system at different speeds and with different strength. Economists call this the transmission mechanism. This guide explains how it generally works; it is not advice for personal decisions.

First reaction: market rates

The policy rate is the short-term rate at which banks borrow from, or hold money at, the central bank. So the first things to move are overnight interbank rates and short-term government bond yields, often even before the decision, as expectations shift. Longer-term rates reflect not just today's decision but expectations about future decisions, inflation expectations and risk sentiment too.

Deposit and loan rates

Over time, banks adjust both the rate they pay on deposits and the rate they charge on loans to the policy rate and market rates. The adjustment is usually delayed and not always one-for-one: competition, the bank's funding needs, the riskiness of the loan and regulation also shape prices. When rates rise, loan rates often go up faster than deposit rates; when rates fall, the opposite can happen.

• Variable-rate loans (whose rate is reset to market rates at set intervals) adjust to the new level relatively quickly.
• Existing fixed-rate loans are unaffected for the life of the contract; the change shows up in new borrowing.
• For time deposits, the new rate applies when the current term ends and the deposit is renewed.
• Where products such as credit cards or consumer loans have legal caps or rules, those can also limit the pass-through.

The exchange rate

If a country's rates rise relative to others, its assets offer investors a higher return, which can support capital inflows and the currency's value. A cut, or a decision looser than expected, can push the other way. But exchange rates depend on much more than interest rates: risk sentiment, inflation, the current account, global conditions and confidence in policy all matter. So there is no mechanical rule linking rates and the currency; the same decision can meet different reactions at different times.

Bonds and shares

Bond prices move opposite to yields: when market rates rise, the price of existing lower-coupon bonds falls, and when rates fall it rises. For shares the effect works both ways: higher rates can reduce the present value of future earnings and make borrowing dearer, but if rates are rising because the economy is strong, company profits may be growing too.

Spending, growth and inflation — with a lag

When rates rise, borrowing becomes more expensive and saving more attractive, so households and firms may postpone spending and investment. As demand slows, price growth is expected to slow too; a cut works the other way. These effects come through with long and variable lags: one to two years is a commonly cited range, but the timing differs between countries and periods. That is why central banks try to set policy with an eye on inflation several quarters ahead rather than today's figure.

Expectations and credibility

Interest rates work not only through their current level but through expectations of where they are heading. If markets have already priced in a hike or a cut, prices move little on the day; the real effect comes when the decision departs from expectations. If people trust the central bank to reach its inflation target, those setting wages and prices act accordingly, which makes policy's job easier.

A few notes on Türkiye

In Türkiye the policy rate is not the only tool: the CBRT also shapes credit and deposit conditions through reserve requirements, liquidity management and macroprudential measures, so the actual cost of funding in the market can at times diverge from the policy rate. When inflation is high, where the rate stands relative to inflation matters as much as its level; this is the real interest rate, explained in a separate guide.

You can see how decisions compared with expectations on the decisions page, and what to look for when reading one in how to read a rate decision.