Higher Central Bank interest rates generally lead to increased saving, less borrowing, less consumption and investment, and thus to less demand for goods and services, which should lead to lower inflation than otherwise.
The key interest rate (sometimes called the policy rate) is the Central Bank interest rate that is the most important determinant of credit institutions’ interest rates and thus other interest rates in society and ultimately supply, demand and prices in the economy – and therefore inflation and the purchasing power of the money that people have.
The Central Bank changes interest rates to influence inflation. If inflation is too high, the Central Bank generally raises interest rates to, among other things, incentivise savings, reduce lending and demand and thereby reduce inflationary pressures. If the outlook is for too low inflation, the bank will lower interest rates. The goal is for the twelve-month inflation rate to be as close to 2½% as possible.