Higher central bank interest rates can have a significant impact on inflation and the overall economy. When the central bank raises interest rates, it becomes more expensive for businesses and individuals to borrow money. This increase in borrowing costs can discourage spending and investment, leading to a decrease in consumer demand and business activity. As a result, the economy may experience a slowdown or contraction.
In terms of inflation, higher interest rates can help to curb rising prices. When borrowing becomes more expensive, individuals and businesses are less likely to take on new loans or make large purchases. This decrease in spending can reduce the overall demand for goods and services, putting downward pressure on prices. Additionally, higher interest rates can strengthen the value of the currency, making imports relatively cheaper and helping to moderate inflationary pressures from imported goods. Overall, by reducing consumer spending and curbing inflation, higher central bank interest rates can help maintain price stability and promote a healthier economic environment.
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