In economics, the interest rate is the price of money in the economy. It determines how expensive it is to borrow and how rewarding it is to save. Central banks use interest rates as their primary tool to manage economic growth and inflation.
When interest rates are low, borrowing is cheap — businesses invest, consumers spend, and the economy grows. When rates are high, borrowing is expensive — spending slows, inflation cools, but growth may suffer. It is a constant balancing act.
The relationship between interest rates and the economy was formalized by economist John Maynard Keynes. Real interest rate = nominal rate minus inflation. If a bank pays 6% on deposits but inflation is 5%, your real return is only 1%. Central banks across the world raised rates aggressively in 2022-2024 to combat post-pandemic inflation.