What happens to interest rate when inflation increases?

When inflation increases, interest rates tend to go up. This is because higher inflation means that the purchasing power of the currency is decreasing, and lenders demand compensation for the decreased value of the money they are lending. By raising interest rates, lenders can increase the return on their loans, which helps to offset the effects of inflation. Central banks also tend to raise interest rates in response to inflation to help keep it under control and maintain the stability of the economy. Overall, the relationship between inflation and interest rates is a complex one, but in general, rising inflation tends to lead to higher interest rates.

The effects of inflation are often not directly felt but are played out over a long time, especially long-term investments are vulnerable to inflation.


At Horizon65, we created a mobile app that enabled you to check the effect of inflation on your savings.

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