If the central bank raises rates, what happens to the currency, bonds and equities?
Linking policy to asset prices — and distinguishing expected from surprise moves.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Usually the currency strengthens (higher returns attract capital), bond prices fall and yields rise — especially at the short end — and equities come under pressure as discount rates rise and growth is expected to slow; long-duration growth stocks and real estate suffer most, while banks can benefit from wider margins. But markets move on surprises: a fully expected hike may move nothing, and a hike with dovish guidance can even weaken the currency.
The full answer
| Asset | Typical reaction to a surprise hike | Why |
|---|---|---|
| Currency | Stronger | Higher yield attracts capital |
| Short-dated bonds | Yields up sharply | Track the policy rate |
| Long-dated bonds | Yields up less (the curve flattens) | Lower expected growth and inflation |
| Equities | Down | Higher discount rate, slower growth |
| Banks | Mixed to positive | Net interest margin |
| Growth and tech stocks | Down most | Long-duration cash flows |
Expectations
Markets price expected policy (futures and OIS curves). The reaction depends on the gap between the decision and guidance on one side, and what was priced on the other.
Mistakes to avoid
Ignoring that a priced-in hike may not move markets.
Follow-ups they may ask
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