How do interest rates impact the overall economy and financial markets?

Interest rates have a significant impact on the economy and financial markets. When central banks raise interest rates, borrowing becomes more expensive. This can lead to reduced consumer spending and business investment, slowing down economic growth. Higher rates also make it more attractive to save, as the return on savings increases. As a result, individuals may cut back on spending, and businesses may delay expansion plans. On the other hand, when interest rates are lowered, borrowing becomes cheaper. This can encourage consumer spending and business investment, stimulating economic activity. Lower rates also reduce the cost of servicing debt, which can help both individuals and businesses manage their finances more easily. In financial markets, interest rate changes can affect the value of stocks and bonds. Higher interest rates typically lead to lower stock prices, as future earnings are discounted more heavily. Bond prices, however, usually fall when rates rise and rise when rates fall.