Interest rates are used by central banks as a main tool to maintain inflation within control. If interest rates are increased, the cost of borrowing will also increase, making borrowing unattractive to consumers as well as businesses. This in the main cools economic activity thereby reducing the level of inflation. Conversely, lower interest rates imply lower borrowing costs thus promoting spending and investment that may enhance economic activity albeit with high inflation risks.

It is true that the dangers of this particular instrument are there. If they increase too rapidly or go up above their level that should be there could be a decrease in economic growth, rise in joblessness and a probable recession. Alternatively, keeping them low beyond recommended period promotes too much borrowing, while at the same time causing asset bubbles and runaway prices. Moreover raised interest can boost the value of a nation’s money making its goods pricier to sell overseas and possibly affecting an equilibrium on trade.