The main reason why inflation affects interest rates is that inflation erodes the purchasing power of money over time.
When prices rise, the same amount of money can buy fewer goods and services, which means that lenders need to charge higher interest rates to compensate for the loss of value.
Inflation creates uncertainty in the economy, and lenders will demand a higher interest rate to account for this uncertainty.
For borrowers, higher interest rates mean that the cost of borrowing money becomes more expensive, which reduces the demand for loans.
This can lead to a slowdown in economic growth and can make it more difficult for businesses to expand or for individuals to buy homes, cars, or other big-ticket items.
On the other hand, higher interest rates can be beneficial for savers and investors.
When interest rates rise, banks and other financial institutions offer higher returns on savings accounts and other investments.
This can attract more money into the financial system, which can be used to finance business expansion or other productive activities.