What are the effects of inflation on interest rates?

What are the effects of inflation on interest rates?

Inflation typically leads to higher interest rates. When prices rise, lenders demand higher rates to compensate for the decreased purchasing power.

Why do lenders increase rates during inflation?

Lenders increase rates to protect their returns. If inflation is high, the money they get back in the future will be worth less, so they charge more upfront.

How does this affect borrowers?

Borrowers face higher costs for loans, which can reduce spending and investment. This can slow down economic growth.

Are there any exceptions to this rule?

Yes, sometimes central banks may lower rates to stimulate the economy despite rising inflation, especially during a recession.

What can individuals do to prepare for rising interest rates?

Individuals can consider locking in fixed-rate loans, paying off variable-rate debts, and saving more to cushion against higher costs.