How and why do interest rates increase?
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Central banks control and generate/print money and inject it into the market. Banks take this loan from it, and then lend the money to you.
Banks do pay interest for their loans. The interest rate you mean is this one. They pay this to the central bank. They lend this money to you at a higher interest rate since they need to profit too.
Lower interest rates mean people can borrow and spend money easily. This creates devaluation in the money and creates inflation. Higher interest rates mean the opposite. Higher interest rate also bears a risk because the largest borrower is usually governments.
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