Forex glossary
Rate Hike vs Rate Cut
A rate hike or cut increases or decreases a policy rate or target range. A hike generally tightens conditions and a cut eases them, considering other instruments and inflation. Currency reactions also depend on expectations; a higher rate does not guarantee appreciation.
Illustrative example
How does it work in practice?
Suppose a policy rate rises from 4% to 4.25%. That is a hike of 0.25 percentage points, or 25 basis points, not 25%. A trader separately assesses whether the decision surprised expectations.
A case to work through
Two units for one change
A fictional rate rises from 2% to 2.5%.
- The difference is 0.5 percentage point, or 50 basis points.
- Relative growth is 0.5 ÷ 2 = 25%.
What follows? Name the unit before reporting the number.
Example boundary: This predicts neither currencies nor account funding.
A useful distinction
Rate Hike vs Rate Cut / Hawkish vs Dovish
Hawkish tone can change without a hike; a hike requires an adopted decision.
Check your understanding
Separate absolute and relative rate changes.
Show the answer and explanation
−25 basis points
−0.25 percentage point equals −25bp.
Reading central-bank decisions
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Read the fuller explanation
Related terms
Sources and documentation
- Transmission mechanism of monetary policy – ECB
Describes transmission channels and long, variable, uncertain policy-effect lags.
Document read: - Monetary policy – Bank of England
Describes Bank Rate and majority decisions of the nine-member MPC.
Document read:
The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.