How can increase in Interest rates of banks contain Inflation?

Question

Hi folks.

I know that increase in food and crude oil prices is fuelling Inflation .But How can increase in Interest rates of banks contain Inflation? what is the relation in this? please expalin

thank you

bharath

Answer 1

Putting interest rates up means we have less money to spend.

Answer 2

When the banks increase their interest rates for their savings, deposits and lendening, their customers tend to increase their savings in order to get more interest. But as they save more, they need to cut down on their spending on goods and services or lower their spending on consumers demands in the economy. As for borrowers increase in interest rates will make borrowings costly. While increases in food and crude oil prices fuelled inflation. Lower consumers spendingon goods and services also means that there is less demand for them and cause their prices to drop and also cause economic slowdown. Increase in savings and higer costs of borrowings lead to less demand for goods and service which also fuelled inflation.  So increases in food and crude oil prices and interest rates of banks can cause less demand for goods and service and therefore fuelled inflation.