How do interest rates impact the economy?

Interest rates play a crucial role in influencing the overall economic activity by affecting borrowing, spending, and saving behaviors of individuals and businesses. When interest rates are low, borrowing becomes cheaper, encouraging consumers and businesses to take out loans for big-ticket purchases, investments, and other expenditures. This increase in borrowing can stimulate economic growth, as more money circulates within the economy due to increased spending.

Conversely, when interest rates rise, borrowing costs increase. This typically discourages consumers from taking loans, leading to a reduction in spending and investment. Higher interest rates can result in increased savings as people may prefer to save their money to take advantage of higher returns on savings accounts or other fixed-income investments. This dual effect can significantly influence overall economic growth, consumer confidence, and investment decisions.

In essence, the dynamic between interest rates and economic behavior highlights their pivotal role in steering the economy's direction and health.