What is an interest rate and how does it affect the economy?

An interest rate is the percentage at which interest is charged or paid on borrowed or invested money. For borrowers, a higher interest rate means higher costs of borrowing, which can discourage borrowing and spending. For savers, a higher interest rate means a better return on savings, encouraging saving rather than spending. Central banks set benchmark interest rates to influence economic activity—lowering rates to stimulate economic growth during a recession and raising rates to control inflation. Interest rates, therefore, play a key role in managing demand, investment, and overall economic stability.