Basically, when the Stock Market crashes (because of people pulling out their money that they had invested) big companies that people buy shares in lose a lot of face value. A lot of these companies invest in other companies and so on and so on. So there is a domino effect that happens.
The banks also invest in companies.
Think of it like the craziest, most tangled up spider web you could possibly imagine, then tangle it up some more and that's kind of what the stock market looks like.
The picture above also shows what the stock market looks like when it's crashing. I think it's a very accurate depiction.
When the banks are investing and being invested in they are just as caught up in it all as everyone else. So when a share market crash comes along, like dominoes, everyone involved falls down for a while, until they figure out how to scavenge their way back up.
Why/how does this impact the interest rates?
look at it this way - If you have invested in shares of a big Bank, and the value of them went down, you’re not going to be impressed, and if they keep going down you will want to sell those shares before they are worth even less and you may even be losing money (see how the domino affect works?), so to keep you on board and happy, the banks have to get money from somewhere. They have money borrowed from them, and the use of that money costs money (what's an interest rate - the fee for the use of money), so the easiest way is to raise the cost of money- the money that’s being used- therefore creating an interest rate rise.
Although the stock market is on a speedy downward trend in America, it dose not seem to be that noticeable here in Australia, so our interest rates will stay pretty where they are for a while. The country we need to worry about is China.
This is how it occurs to me, feel free to post your thoughts!
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