How does raising the interest rates fight inflation? From what I’m seeing in real estate, the higher rates keep home prices low(er) than they could go. Is that why? But what about car loans? Help!
(No politics please)
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When interest rates are raised, it becomes more expensive (for individuals, companies, banks, basically everyone) to borrow money. It also means that money kept in savings will receive a higher return.
So in a relatively short period of time, a rise in interest rates can get a country to cut down on spending. And if people aren’t buying stuff, prices will stop increasing (i.e. inflation will slow down) due to lack of demand.
No doubt there is a much more complete explanation to it, but hopefully this provides an intuitive understanding of the basic idea.
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