How do central banks influence the stock market?

Central banks influence the stock market by changing interest rates, managing inflation, and controlling liquidity in the economy. When they lower rates or print money, stock markets often go up. But when they hike rates or reduce money supply, markets can fall. Investors watch every central bank move to decide when to buy or sell stocks.

Why do stock markets react to central bank decisions?

Because central banks control interest rates and liquidity. These two things directly affect corporate profits, investor sentiment, and market trends. For example, when interest rates are low, companies borrow cheaply and grow faster. Investors also prefer stocks over fixed deposits or bonds.

What happens when interest rates go up?

Higher interest rates mean loans become expensive for businesses and individuals. This can reduce corporate earnings and slow down the economy. As a result, investors may sell stocks and move to safer investments like bonds or FDs.

So, when central banks hike rates, the stock market usually turns cautious or bearish.

And what if interest rates go down?

When central banks cut rates, borrowing becomes cheaper. This leads to more business investment, consumer spending, and economic growth. Stocks usually rise because investors expect better profits from companies.

Low interest rates also make fixed-income options less attractive, so people prefer to invest in stocks.

What is quantitative easing (QE) and why do markets love it?

QE is when central banks inject money into the economy by buying bonds. This increases liquidity and lowers long-term interest rates. Stock markets love QE because it boosts spending, investments, and corporate growth — all good for share prices.

QE played a big role in pushing markets higher during the 2008 crisis and again during COVID-19.

Central banks hold massive power in shaping stock market direction. From interest rates to liquidity tools like QE or repo operations — each policy shift influences investor mood. A supportive stance boosts markets, while a tightening tone may trigger corrections. This is why traders and investors watch every central bank move and speech like a hawk.