High Interest Rate Policy
A high interest rate policy covers central bank measures that raise interest rates or keep them high – usually to fight inflation and prevent the economy from overheating.
Approx. 2 min read · Updated October 9, 2026
What is a high interest rate policy?
A high interest rate policy covers all measures by which a central bank raises the interest rate level of its currency or keeps it at a high level. It is also known as tight, restrictive or contractionary monetary policy, and central bankers who favour it are called "hawks".
Goals and effects
The main aim is usually to fight inflation by slowing the growth of the money in circulation. A high interest rate policy also slows investment in order to prevent the economy from overheating: companies and private borrowers must expect higher interest costs on new loans. If the rate on a $100,000 business loan rises from 4% to 7%, for example, the annual interest bill climbs from $4,000 to $7,000, and some planned investments are no longer worthwhile. In addition, the central bank wants to prevent capital from flowing out into other currencies whose interest rates are higher than those of the home currency.
A well-known example is the US Federal Reserve under Paul Volcker, which raised rates to record levels in the late 1970s and early 1980s to bring double-digit inflation under control. The risk of such a policy is that it slows the economy too much and triggers a recession.
Why it matters for traders
Interest rates are among the strongest drivers of exchange rates. Rising rates – or the expectation of them – tend to attract capital and support a currency. In forex and CFD trading, interest rate levels also determine the swap, the financing charge or credit for positions held overnight. Stock indices, on the other hand, can come under pressure because credit becomes more expensive and future profits are discounted more heavily. Central bank announcements, such as the decisions of the FOMC, are therefore key events.
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More terms.
- Low Interest Rate PolicyA low interest rate policy covers central bank measures that lower interest rates or keep them low – usually to counter deflation and encourage borrowing and investment.
- InflationInflation is a general and sustained rise in the price level of goods and services, which means that money steadily loses purchasing power.
- Central banksA central bank conducts the monetary policy of a country or currency area. Its decisions on interest rates and the money supply – above all those of the ECB and the Fed – move financial markets.
- FOMC (Federal Open Market Committee)The FOMC (Federal Open Market Committee) is the monetary policy committee of the US Federal Reserve. It sets the target range for the federal funds rate.