If inflation is the target of a central bank, why would one increase interest rates?

Question

hypothetical

Answer 1

If interest rate is higher then it is more expensive to borrow thus people less able to get easy money to purchase goods and services. It reduces aggregate demand preventing price level from old growth.

But it is only demand-side effect. Here is also supply-side effect of such policy if it used without discrimination or untargeted way (firms due to higher interest rates invest less and it may lead to fall in domestic supply etc.)

Answer 2

Interest rates are set by supply and demand just like every other price in the market. However the fed can lower rates by increasing the supply of money available for loans, but they do this  with created money. They can also withdraw money from the system  by reversing the process and cause rates to increase. Since the price level is a function of the amount of money in the system and the amount of goods, their actions affect the price level, that is the inflation rate.

Answer 3

So people will not buy expensive goods (that typically require a loan).

When demand for products decrease, the price of those goods decrease, and inflation also decreases.

Answer 4

One would increase interest rates to try to tackle inflation. If interest rates are lowered, the money is of less value, and prices go up as a result (inflation).

The opposite happens (well, is meant to) when interest rates are increased, and deflation (lowering of prices) occurs, due to decreased demand.

When the economy is in a bad way though, central banks are reluctant to increase interest rates, because if firms cannot obtain money as easily, many businesses go bankrupt and it makes the situation worse. The idea would have been to boost economic activity in a recession, but the lowering of prices is no good if firms cannot access money to spend in the first place.