What is the role of central banks in setting interest rates?

What is the role of central banks in setting interest rates?

Central banks manage interest rates to control inflation and stabilize the economy. They adjust rates to influence borrowing and spending.

How do changes in interest rates affect the economy?

Changes in interest rates can impact consumer spending, business investment, and overall economic growth. Lower rates encourage borrowing, while higher rates can slow down spending.

What tools do central banks use to influence interest rates?

Central banks use tools like open market operations, discount rates, and reserve requirements to influence interest rates and money supply.

Can you explain how inflation relates to interest rates?

Yes, typically, when inflation rises, central banks may increase interest rates to cool down the economy and bring inflation under control.

What happens if a central bank keeps interest rates too low for too long?

Keeping rates too low for too long can lead to excessive borrowing, asset bubbles, and ultimately, higher inflation.